Surviving Market Turbulence
Van Richards, ChFC?, RICP?
Retirement Planning Specialist and Writer | Educating and helping people achieve their retirement goals, life insurance needs, and Christian entrepreneurship vision through my practice and writing.
Even the most optimistic people are feeling the pinch of the economy. If you are one of those that are scared to look at your 401k or IRA, you’re not alone. If you’re a younger investor, consider that time is on your side. IF you’re an older investor, you may need to pay closer attention to your investments.??
Let’s take a realistic look at the situation. First, people can be frightened by economic downturns and volatile investment markets.?
Economic downturns and turbulent investment markets can make people nervous. However, it is necessary to remember that these events are a natural yet unpleasant aspect of the economy.?
With that in mind, here are seven ideas to remember during these unpredictably volatile times.?
Don't Panic
If the stock market jumps around like a cat on a hot tin roof, some people may be tempted to throw in the towel and sell their investments. But ask yourself this question. Could selling now solely because the stock market is in freefall make your result worse??
The probability is that if you are a long-term investor selling now would decrease your long-term returns. But you do have to believe that the market has particular patterns. What would happen if you sell and the market bounces back? Look at what has occurred over the past twenty years. The graph below shows the results of missing the best 10, 20, and 30 gains in the market over the past 30 years.??
On the negative side, remember that this view is probability-based and not guaranteed.??
Be Calm and Stay Invested?
For long-term investors, staying invested is usually the best thing to do. The graph below reveals how selling out of the market, only for a few weeks, can forfeit significant investment gains. If missing the top ten days seems unlikely, consider that seven of the top ten days in the last twenty years happened within two weeks of the worst ten days.
Look at what happened over the past twenty years. You'll hear me repeat this today, but this is important to remember. Keep in mind that the past performance of an investment is not a guarantee of its future performance.?
Yet, for those who are not fans of probability-based investing, I know that you are more concerned with the return of your money than the return on your money. If that describes you, there are always fixed-rate annuities and guaranteed bonds like I-bonds.?And for some people, that is there a right way to save.?
Inflation is the Enemy!
If the stock market posted gains and losses every other year, imagine what you would lose by selling after a dip. So, where would you put your money? A money market account might earn a steady 1.3%, but that won’t keep up with the average long-term inflation rate of 2.15%. And keep in mind that inflation is now running over 8%. Plus, even the most optimistic economists admit that inflation will probably not return to those low numbers for a long time.?
Inflation will decimate your income if you are retired and expect to live for another twenty or thirty years. So how can you keep up with inflation? First, retirees will have to be very careful about their spending. And?accept that their fixed investments will actually give negative real rates of return. Or be willing to take more risks with money they expect to spend twenty years from now.?
Regardless if you're a younger or older investor, there are three keys to your future financial success:
Keep a long-term perspective.?
Focusing on your long-term life objectives rather than the daily or monthly swings of the markets will make it easier for you to maintain the course.??
Look at the past twenty-year averages. But again, keep in mind that the past performance of an investment is not a guarantee of its future performance.?
领英推荐
Here is an approach to keeping on top of your investing.?
§??tactical allocation is the investments you selected. Ask how’s that going??
§??Strategic allocation is the percentage you put in different sectors. Does your strategic allocation still fit your risk tolerance and objectives??
§??consider benchmarks??
§??consider the current economic environment?
?Dollar-Cost Average
Dollar-cost averaging is an effective technique for investing. The idea is simple. All you have to do is set up a recurring investment of the same amount. The result is that you purchase more shares when the value drops and fewer shares when the price rises. The objective is to get an average price higher than the amount of money you have invested. Keep in mind that dollar-cost averaging is not a magic wand. The technique requires a steady investment regardless of changes in price levels. It would be best if you considered your ability and willingness to keep making purchases despite changing price levels. Dollar-cost averaging does not guarantee a profit and does not offer loss protection in down markets.
Maintain a Diversified Portfolio?
Typically not all sectors or markets move together. Diversification allows lowering your chances of loss. Gains elsewhere may offset losses in another sector. But as with most strategies, you must consider the downside. A diversified portfolio does not necessarily outperform a non-diversified portfolio or increase overall returns. Diversification does not offer market risk protection. There will be times when ALL investments are down.??
Know Your Risk Tolerance?
Generally speaking, the more risk you are willing to take, the higher your allocation is in stock-oriented investments. You can get more specific with the sector or global market you invest within. The more conservative you are, the higher your allocation will be to more stable investments such as bonds. But this can be more specific by including higher-quality stocks as well. There is no perfect mixture. And if you are just fed up with any risk, you can always look for the guaranteed options.?
Keep in mind that your risk tolerance will probably change. That change could be because of economic factors such as extreme market volatility. Or that change could be because of changes in your life. For example, as most people age, they tend to be less willing to take risks.??
Be Thoughtful and Seek Guidance
If you choose to adjust your investments, do that after giving the situation serious thought. Try to avoid kneejerk reactions. But keep in mind that if circumstances have changed, ignoring those circumstances will not make them go away. Talking to a financial professional is always a good idea. Remember, sometimes you don’t know what you don’t know.
In ending, please remember that this information is for educational purposes only. It is not investment advice.
If you'd like to learn more investment strategies, visit the blog at?Richards Financial Planning, LLC
Have a great week!
Van Richards, ChFC?