We have recently seen some large swings, both positive and negative in the equity markets. While these swings are typical and expected in any market cycle, they can make some investors nervous. Below are a few thoughts to help you navigate this choppy market.
1) Asset Allocation - Make sure your investment account is properly invested between stocks and bonds per the level of risk you are willing to take long term. Review your mix of stocks to bonds to ensure that you are not too heavily weighted one way or another. In addition, take into account when you plan to retire. The closer you are to retirement, the less risk you may want to take. In general, a person at or near retirement may want to have a portfolio that has 60% stocks and 40% bonds. (Remember that most people will have a twenty or thirty year retirement. In order to keep pace with or outpace inflation, you should have exposure to the stock markets.)
2) Diversify - Make sure you diversify your investments between large, medium and small companies both in the US and internationally. This is a process of spreading your money amongst many different asset classes. Diversification further reduces your risk of large losses when combined with asset allocation.
3) Rebalance – Rebalance your account on an annual basis at a minimum. This is a process of selling high and buying low. (Isn’t this our goal?) When the market is up, you will end up selling stocks to buy more bonds to bring you back to your chosen Asset Allocation. When the market is down, like today, you will be selling bonds to buy stocks. (This seems scary but can be in your best interest long term.)
4) Monitor your investments – From time to time, review where your money is invested to make sure the chosen investment is performing well compared to its peers. In addition, life will change and your investment strategy may need to change as well.
5) Consider increasing your contributions during down markets – Down markets can provide an opportunity for retirement plan participants to purchase stock ‘on sale.’ Each time you contribute to your retirement plan through your paycheck, you are actually buying shares of stock. Today, those shares are less expensive than they were six months ago. By increasing your contributions to your retirement plan today, you are actually able to buy more shares of stock at a lower share price. In the long run, this can be a very good strategy to help you build wealth. (Down markets can be your friend!)
6) Stick to your plan – Make sure to keep a long-term perspective when it comes to your retirement account. Don’t panic in market downturns. Historically, about 30% of the time we will experience a negative return in the market. Downturns in a market are not uncommon—rather, they are expected from time to time. Keep the course for your chosen path.
7) Consult a professional – We suggest you work with your financial advisor to discuss the best strategy for you and your family. There is no ‘one solution fits all.’
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