Back On Track
Our Personal Finance Expert shows you how to deal with the ups and downs of the stock market.
Q: Help! I just looked at my brokerage account. Instead of retiring early, I may have to work until I'm 100! What can I do to get my financial goals back on track?
A: While the stock market has corrected recently, that doesn't mean the end of life as we know it. On the contrary-this is how markets are supposed to act. Isaac Newton probably said it best: "What goes up must come down." The market's recent fluctuations may seem a bit extreme, but this volatility may be here to stay. Fortunately, there are a lot of things you can do to ensure that you'll be spending your golden years in some place other than working at the Golden Arches. Here are five steps you can take now:
1. Don't just do something-sit there. Selling out as your stocks hit bottom may not be the smartest action to take. Instead, compare your portfolio with other similar funds and benchmarks in appropriate market sectors. For example, if your large company growth-stock mutual fund is off by 3 percent, compared to the S&P 500's more than 8 percent fall from grace, your fund is actually doing well. The secret here is to have a little patience: Mutual funds are long term investments, not a spot for fair-weather friends.
2. Assess your risk tolerance. Investments keeping you up at night? Now could be the time to have a heart-to-portfolio talk with yourself. Anyone can take a big risk-and feel proud of themselves when they make a killing. The secret to investing success, however, lies not in the return on your money but the return of your money. If you find yourself worrying about your investments, the risk level may be too high. Consider repositioning assets to investments that have less volatility. This may mean lower returns, but isn't a good night's sleep worth it?
3. Dollar Cost Averaging (DCA) is your friend. Volatile or down markets provide the perfect platform for adding to an investment on a periodic basis. In down markets, your periodic purchase may be buying shares at lower and lower prices. While you need to have the money to keep this up, it's often better than trying to pick the best day to invest-whenever that is! If the market suddenly starts going up, you'll be paying more for shares than you would have on a down day. So while DCA won't make you rich tomorrow, it makes you a regular investor-and that's a sure way to wealth.
4. Neither a borrower nor a lender be. Buying stocks on margin? Make sure you understand how these accounts work. Margin accounts allow stockholders to buy additional shares of stocks using their shares as collateral. A fall in the price of shares held in the account may necessitate immediate action on your part-if you can't send in money to meet a margin call, the brokerage firm has the right to sell your stocks. Period. You could lose everything, and then some.
5. Assets, assets, where are your assets? With recent market run-ups, you may find your portfolio woefully overweighted in certain sectors. The past few years have been great for tech stocks and large-cap growth funds, and many investors' portfolios are underweighted in small company stocks, fixed-income investments, foreign investments and value-oriented stocks or funds. Consider your risk tolerance and then rebalance your portfolio. When the markets turn and go another way, you won't have most of your eggs in one basket.
Whatever the ups and downs of the financial markets, remember the adage that's attributed to portfolio manager Peter Lynch: When it comes to investing, the most important organ isn't your head-it's your stomach!
|To err is human; to put your personal finances in order is divine. One expert shows you eight common mistakes you can avoid. Check out "Follow the Rules."|
Lorayne Fiorillo is a financial advisor and senior vice president at a major brokerage firm. She spent six years as the on-air financial commentator for EyeWitness News and 11 years as a market commentator for National Public Radio. She is the author of the new book, Financial Fitness in 45 Days: The Complete Guide to Shaping Up Your Personal Finances (Entrepreneur). She specializes in retirement and business planning for small businesses.
The opinions expressed in this column are those of the author, not of Entrepreneur.com. All answers are intended to be general in nature, without regard to specific geographical areas or circumstances, and should only be relied upon after consulting an appropriate expert, such as an attorney or accountant.