Keeping Calm in the Midst of Mayhem

by Michelle Smith

If your investments have suffered from recent market conditions,
you might be wondering if it’s time to make changes to your portfolio.

 

Even in the midst of market turmoil, the same investing principles prove out. Buying shares when they’re flying high and selling them when they’re
rocky doesn’t add up to a sound strategy. History has shown that investors who create a solid, longterm investing plan and stick with it have fared well over the long haul.

If you’re relatively new to investing, take heart— there are things you can do to get through today’s fire drill and better prepare for your financial future.

Get Real About Your Risk Tolerance

It’s easy to invest aggressively when the market is riding high, but now that there’s been a major hiccup, how are you stomaching it?

If you’ve bitten off more risk than you can chew, it’s time to get real about how comfortable you actually are with risk. While the value of your investments may be down, it could be worth moving some of your riskier investments for your own peace of mind.

Balance Your Assets

Asset allocation refers to the amount of investments you have allotted to different asset classes— stock, fixed-income [bond] and money markets [cash]. Within each asset class, it’s a good idea to diversify among different types of investments, including a variety of company sizes, sectors, styles of investing, types of bonds, etc.

Depending on your risk tolerance and time horizon, consider having a specific percentage allocated to each type of investment. For example, a typical moderate investor could have 60 percent in stock funds, 30 percent in bond funds and 10 percent in money markets. Some companies offer asset allocation funds that take care of the mix for you. The key to altering your mix while the market is down is making small changes over time to offset potential tax implications.

Rebalance Periodically

Once you achieve a comfortable asset allocation that fits your new risk tolerance, financial experts recommend you rebalance once a year to restore your predetermined mix. For example, if your fixedincome investments have gained in value and your stock investments have declined, a moderate portfolio from the example above may have shifted to 50 percent stock, 40 percent bond and 10 percent cash. Selling some winners and purchasing a few “losers” while they’re low can help you re-establish your chosen mix.

Keep Your Emotions in Check

It’s easy to let negative economic news influence you. But remember, the same guidance that applies during good financial times is relevant during uncertain ones. Investing is a long-term proposition that requires patience and focus. By taking the anxiety out of financial decisions, you can avoid reactionary moves that could have lasting repercussions.

Make Your Money Work for You

Investing a set amount on a regular schedule helps conveniently detach your emotions from the equation. It can be hard to start or increase saving when the economy is unstable. The important thing is to begin as soon as you can and to continue making regular investments. Many fund companies have automatic investing programs to help you start with a low initial investment.

Automatic investing also has the advantage of dollar-cost averaging. While it doesn’t feel good to lose a huge chunk of your portfolio’s value due to a market downturn, consider the positive. You have the opportunity to buy more shares for less money, and when the markets recover, you have the potential for appreciated value on those shares you bought at bargain basement prices.

This strategy focuses on selling investments when they’re high and buying investments that are currently low. While not a novel concept, it’s one that many investors fail to do. Any change can be hard, but with a little discipline, you can reap the benefits of tried-and-true investing principles.

Consider Professional Help

The crucial factor in selecting any investment is its fundamental strength over time, not current share price. If you are uncomfortable making investing decisions by yourself given market uncertainty, it can be well worth the price of a financial professional’s services. If you invest through mutual funds, contact your fund company to ask if they offer advice. To find a financial advisor, ask family and friends for referrals or contact a financial professional association.

Return to Ingram's December 2008

Michelle A. Smith is Managing Director, Mutual Fund Education Alliance. 
P     |    816.454.9422
E     |    msmith@mfea.com