Staying Sane in the Midst of the Craziness
Recently I was at a women’s breakfast event and I overheard a few women say how glad they were to have switched their 401k investments to cash because they couldn’t bear to lose any more money due to the recent market volatility. These women were still in their 30’s or 40’s, retirement a good 20 years plus away. Having long term retirement money in cash, probably not the best idea, even given all the recent market volatility. It got me thinking, is this how most people invest their assets for the long run? By timing the market and trying to figure out the best time to sell out and switch to cash?
Market volatility is a normal occurrence when investing in the stock market, yet as much as you know it to be true, it can be tough to handle when it’s your own money at stake. Warren Buffet states, “It won’t be the economy that will do in investors; it will be investors themselves.” History shows that markets go up and they go down and while there may be short term fluctuation, sometimes really large ones, like last week in the stock market (August 8, 2011- August 12, 2011), historically the markets tend to rebound and reward those investors who stick it out and stay the course. And while no investment strategy ensures a profit, it’s good to keep in mind some helpful tips when investing for the long term.
Tip 1- Diversify, diversify, diversify
Diversification is one of the key ways to handle market volatility. That’s because different asset classes often perform differently from one another so spreading out your money between all asset classes, i.e. stocks, bonds, cash, real estate, can potentially help reduce your overall risk. When one asset class may decline another may perform well, balancing out your overall portfolio risk. Although diversification cannot eliminate total market risk, it helps smooth out the ride.
Tip 2- Don’t let your Emotions Get in the way
This tip is easier said than done. Market volatility usually drives emotional decisions. However our emotions usually lead to irrational and impulsive decision making and can potentially compromise the long term performance of your investments. People tend to buy high and sell low, opposite of what you want to do, because their emotions get in the way. Keep in mind that the media also loves to drive fear and anxiety into its audience. Otherwise why would you keep tuning in if they said they same thing over and over. Before you decide to react to the market volatility, take a minute to review your financial plan and goals. If you’re goals have changed then you may need to make a change to your investment strategy. But if your financial situation is the same and your goals are the same, then you need to stay the course and ride the waves.
Tip 3- Market timing doesn’t work.
During volatile markets you will be tempted to pull all your money out of the stock market and invest in lower risk investments such as cash, but don’t. You have to remember those less volatile investments also have less return over time. They may seem like he better option when your investments are in the negative territory, but remember it is taking on the negative returns that allows for a higher average return potential over time. More risk, more return potential. If investors were not rewarded for the extra risk they took on by not knowing what their return is going to be in any given year, then no one would invest in the stock market. But investors, who stay the course, have been historically rewarded for their patience. However many people, including the woman mentioned in the first paragraph think they can shift their investments to and from stocks to cash avoiding market downturns. But by trying to time the market like that, they often miss the markets best returns. If timing the market were possible, every investor would be rich. Knowing when to get out and get back into the stock market is a game you don’t want to play.
You can see in the chart below that even missing the top 50 days in the stock market can dramatically affect your overall performance. *Keep in mind, past performance is no guarantee of future results.
Tip 4- Focus on Dollar Cost Averaging
Dollar cost averaging is one of the easiest investment strategies to implement. It is simply deciding to invest a specific amount into the market at regular intervals over time. Most individuals do this within their 401k plans at work. For example, if you are saving 7% of your salary into your 401k, every month that 7% get invested regardless of how high or low the stock market is. Over time dollar cost averaging helps you buy more shares when the stock price is low and less shares when the stock price is high, resulting in a lower average stock price over time.
*Dollar cost averaging involves continuous investment in securities regardless of fluctuation in price levels of such securities. An investor should consider their ability to continue purchasing through fluctuating price levels. Such a plan does not assure a profit and does not protect against loss in declining markets.
Tip 5 – Have faith in the future.
Nick Murray, one of the financial industry’s premier speakers, and the author of eleven books for financial services professionals, states it pretty simple, have faith in the future. By this he means, when you are investing in the stock market, you have to have faith that even during the hard times, things will get better. He even created a mantra you can say daily on your road of investing: “I don’t know exactly how things will turn out all right; I just know that they will turn out all right.”– Nick Murray. I agree with this 100% because at the end of the day you have to have faith that our people, country and world will continue to be resilient and find solutions to our problems making the future a better place.
Here are also some Common Investment Mistakes to Avoid
- Making investment decisions based on emotions and not on facts
- Choosing investments that are not suited to your goals or investment time horizon
- Failing to diversify, putting all your eggs in one basket
- Reacting to short-term events and not to long-term trends
- Trying to time the market
- Buying “hot” investments with no sound basis for your decision
- Allowing fees, expenses, and/or commissions to become the major factors in making an investment decision
- Allowing fear or greed to drive your investment decisions
Remember to work with your financial professional during these difficult times to ensure your short term and long term investments are in alignment with your financial goals, needs, and risk tolerance. For more information, please feel free to email me at Brittney.firstname.lastname@example.org and remember to “Like” us on Facebook!