Coping With Market Moves
When markets near high records, you wonder, “Is this a bubble?” When markets dive, you wonder, “Is this a crash?” Your biggest question: How do you keep your head on the recent Wall Street rollercoaster?
After one of the markets’ worst Januarys in years, both the Dow Jones Industrial Average and the Standard & Poor’s 500 recently notched record highs – enough whipsawing to make your neck and your retirement accounts ache.
There’s an effective medium, though, between doing nothing and panicky trading. These guidelines can keep you level-headed even while the markets twist and turn (which they always will).
Revisit or develop your investment policy statement. An IPS describes procedures, your investment philosophy and style, guidelines and constraints for you or your advisor to manage your investments. An IPS serves as your guardrail so you don’t veer all over, chasing investments or changing your strategy as markets change.
To begin creating your IPS, write down your key investing goal and the year in which you hope to reach it. If this goal will take you years (such as funding your retirement or paying for a child’s college education), try to figure your own longevity – then add a few more years. Quantify how much your goal costs and remember to adjust the cost upward to reflect inflation’s likely future impact.
Next, set your asset allocation targets for investments. Your IPS needs to fix a range for your asset allocation rather than a static figure for each class; this increases your options for making investment decisions if the markets rise or dip just a little.
Finally, document specifically the market conditions that will spur you to make investment decisions. That way you’ll know what to do and exactly when – not just when your emotions move you.
Use indexes. These are diversified buckets of holdings that follow general market rises and falls. The odds of all the companies going to zero at the same time in an index are slim. The odds of one or a few companies dropping to zero at the same time are even greater.
You may reduce your worries about losing your money – although index value still goes up and down – as well as grow comfortable with changing values and learn how to rein in your exposure to those changes.
Investing in more than one index is also a basic part of protecting your portfolio with diversification and asset allocation (two different tactics).
Forget about predicting the future. Correctly guessing one event is lucky. Nailing 10 events – that’s prediction. Nobody accomplishes that regarding the markets.
Approach investing with no predictions: Being wrong can carry huge costs.
Develop a prudent plan. Include structured processes with decision rules to guide you and that already consider markets always going up and down. The degree of ups and downs you weather depends largely on your tolerance and capacity for risk.
Customize your portfolio. Base it on the principles above and tailor it to you and your situation. Don’t invest based on chit-chat around the water cooler, structuring financial moves based on someone else’s situation and needs. To do so sends you chasing investments that are merely hot and not necessarily what’s prudent for you.
Combining and using these principles can provide you some comfort during any market.
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Larry R. Frank Sr., CFP, is a Registered Investment Adviser (California) in Roseville, Calif. He is the author of the book, Wealth Odyssey. He has an MBA with a finance concentration and B.S. cum laude in physics with which he views the world of money dynamically. He has peer-reviewed research published in the Journal of Financial Planning. http://blog.betterfinancialeducation.com/.
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