The recent market has not been kind to the weak-at-heart. Some are afraid to check to see what the market is doing. Here are some survival tips to help you through markets as these.
1) Re-evaluiate Your Tolerance For Risk
If you like the ups, but not the downs, take advantage of a rally and cut back on the stocks in your portfolio so there's less of a percentage of equities. Sell them while they're high and invest in something less volitile.
2) Invest In Diversified Funds
If the scope of the mutual funds in which you invest is narrow, then you run the risk of having huge losses during downturns. Remember, you haven't lost anything until you've sold; however, it could be you need to sell during a down time to match expenses.
You want to be diverisified between investments (a mixture of stocks and bonds) and within investments (not just growth stocks, for instance.)
According to Morningstar, inc. funds that concentrate on financial companies are down 14%; however, large-blend funds are only down 1% for the same time period. Similarly, conservatively allocated funds, which invest a higher percent in bonds are up on average 2% for the year.
3) Invest In Moderate Gain Funds
There are funds that aim at reducing volatility; you won't hit the big time, but you may be able to sleep better in down times. If these funds are down, it won't be as drastic, so it's easier to recover. This also reduces the risk your fund will be down substantially if you need to liquidate for an emergency or living expenses, as negative returns force you to cash more in.
If you invest in funds that invest only in blue-chip dividend-paying companies, you will reduce your volatility.
4) Don't Time The Market
I don't care if you think you're Warren Buffet or Jimmy Buffet, you cannot time the market, so don't try. As the economy grows, if it ever does again, stock prices will appreciate.
It is important to make sure you rebalance your portfolio from time to time. When do you do that? When your desired levels are 10% off their mark. In other words, if you want 60% stock and 40% bonds and your portfolio reaches a level of 75% stock and 25% bonds, you need to sell stock and buy bonds, and do it gradually.
5) Have Cash Will Travel
You need at least three months, if not triple that amount, of living expenses in cash at all times. This will keep your anxiety level down as you won't be forced to sell in a down market if you need to meet your needs.
6) Stock-Free Does NOT Mean Risk-Free
Jefferson Count, AL just declared bankruptcy; would you want to be holding their bonds? Also, we're in a low-interest rate environment; remember, the price of a bond is inversely proportional to the rate. Translation: prices move in the opposite direction of rates. So...if rates go up, and they won't stay down forever, then the value of your bond goes down.
7) Get Help
There are many financial planners out there willing to help. Make sure they charge a fee and don't work on commission; those that work on commission may be more likely to sell you something from which they make a higher commission.
Planners will help you assess your tolerance for risk and will tailor your investment strategy to that risk.
How are you sleeping these days?