What Should I Do Now?
A Back-to-basics Approach Is Key to Investing Success
The roller coaster ride of the past few years has left many investors growing weary of the extreme market volatility and muted investment returns. Increasingly, individual investors are facing decision time. ‘What should I do now?’ is a common question.
For starters, avoid panic and keep a cool head. Timing the ups and downs of the market is difficult, at best, for professional portfolio managers to do, let alone the average investor.
Most importantly, it’s time to revisit a sound, time-tested investment strategy known as asset allocation. Simply put, asset allocation is spreading money among a variety of different asset classes such as stocks, bonds, and cash-equivalent investments.
Different investors approach asset allocation in different ways. Thus, generalizations about its importance are difficult to make. Your personal risk tolerance varies greatly depending on your age and your savings goals. When assessing your personal risk tolerance, it is important to decide how much volatility you can live with and still sleep at night. You will also have to consider factors such as your cash flow requirements, liquidity needs, time horizon, tax situation, and financial goals.
When determining your asset allocation, keep an eye on diversification. History has proven that no single investment performs well under all economic or market conditions. By dividing your investments among a variety of investments such as stock funds, based on style (growth, income, and value), size of the company (small, mid-, and large-cap), and location (domestic or international), you can potentially reduce the impact that one poor performer may have on the overall portfolio.
Investing Strategies Beyond Asset Allocation
Once you have settled on an appropriate allocation among stocks, bonds, and cash based on your risk level, you should consider monitoring your portfolio on a period basis. A strategy you might consider is annual rebalancing. This strategy keeps your investment allocation aligned with your investment strategy by automatically selling asset shares that have outperformed and investing in asset shares that have underperformed. If market changes cause your portfolio to become overweighed in one type of investment, your portfolio is re-adjusted automatically to match your original asset allocation.
Another proven long-term investing strategy is dollar cost averaging.* While it may require discipline, especially in a down market, investing a fixed amount on a regular basis can allow investors to take full advantage of long-term growth. When prices are low, your investment buys more shares, and when prices are high, you will buy less. The practice keeps you active in the market at all times, and research shows that staying in the market is far more successful than jumping in and out, trying to time the upswings and downswings.
Don’t Go It Alone
During the roaring 1990s, many felt working with a financial professional was almost unnecessary. Many investors simply placed money in the market and saw double-digit returns, sometimes in as little as a few months time. In the new era of financial reality, we have learned that portfolio-management is a dynamic decision-making process that requires ongoing monitoring and evaluation.
Because investing often becomes an emotional process to the non-professional, it’s a good idea to consult with a knowledgeable financial professional, who can help you determine which asset allocation is right for you.
A financial professional can help you identify attractive investment opportunities, put market volatility into perspective, and create an investment strategy to help you reach your financial goals.
*Dollar cost averaging does not assure a profit and does not protect against loss in declining markets. The investor should carefully consider financial ability to continue payments during periods of low price levels.
