Leave Your Emotions Out of It
It’s a basic part of investing—financial markets go up and down. When the downturn is dramatic, as it was several years ago, it can be tempting to take quick and decisive action. But making investment decisions based on your emotions may not be the best thing for your retirement account over time. Keep your investments on track by focusing on the long-term perspective instead.
Here are some time-tested strategies:
In many cases, when markets go south, the worst thing an investor can do is panic and start selling investments. When you try to time the market, you’re usually selling when prices are falling and buying as they rise—a sure way to lose money. What’s more, an investor who leaves the market when it’s in decline may not reinvest in time to benefit when the market rebounds.
One of the best ways to spread out your investment risk is to allocate your money among the different asset classes (stocks, bonds and cash equivalents). Make sure you’ve chosen an appropriate investment mix for your financial goals, tolerance of investment risk, and the number of years until you plan to retire. Take a look at your portfolio with a financial professional, if possible. Asset allocation, however, does not guarantee a profit or protect against a loss.
STICK TO YOUR PLAN.
Once you have an allocation that works for you, stick to it. Don’t make changes in response to short-term moves in the market—make changes because something basic in your life has changed. If you’re properly prepared with a long-term plan, the best response in a down market may be to do nothing.
CONSIDER YOUR TIME FRAME.
You may have decided to play it safe with a more conservative investment strategy that delivers mostly predictable, if modest, returns. Keep in mind that a more conservative approach may leave you vulnerable to the rising costs of inflation over time. On the other hand, the closer you are to retirement, the less time you have to wait for stock market recoveries, so you may want to reduce your investment risk. Just be aware that all investments possess some element of risk, including the possible loss of principal.
A stock market downturn can test your confidence, but it’s no time for hasty actions. A disciplined, long-term program is your best strategy for weathering short-term changes in any investment climate.