In Turbulent Times

A troubled period in the stock market is no time for rash decisions. The basic rules of sound, long-term investing apply more than ever.

In Turbulent Times

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If you’re like most investors, you may be thinking the best bet in recent stock market gyrations wasn’t on Wall Street but in the antacid aisle at the local pharmacy. It’s no news flash that stocks have been fickle performers over the last few years.

Still, even tough times can teach lessons, if we’re willing to learn them. As the market continues to hunt for stability, this may be a good time to remember the basic rules behind sound investing, and how they apply in uncertain times. So, here are some rules to invest by.

1. Don’t believe everything you read. One of the worst things you can do is react to things you read on the business pages or in financial magazines. If you’re looking for recommendations on specific investments, consult with a trusted, knowledgeable and ethical investment advisor.

2. If you don’t have an advisor, get one. The best kind is someone who sells you only investment advice, not investments themselves. Most experts say anyone with even modest assets, especially assets they hope to grow and pass on to heirs, should get the advice of a fee-only financial planner. That person, instead of earning commissions for selling investment products, charges a fee to give you clear and well-reasoned advice tailored to your specific circumstances.

3. Remember to think long-term. In this case, long-term means money you don’t need for at least five years (10 is even better). “As long as your perspective is longer than five years at a minimum and certainly 10 or beyond, there shouldn’t be any reason to be concerned,” says Kris Johnson, a fee-only financial planner at Timothy Financial Services in Wheaton, Ill.

4. Don’t forget about the short-term. The flip side, of course, is to make sure you have liquidity for the short term — money that is safe and readily accessible so you don’t have to cash in your stocks at a loss just to keep the business going. That might mean short-term CDs, short-term bonds or a money-market fund that supplies adequate cash flow. “The last thing you want to do is to be pulling money out of the market to prop up your business,” Johnson says.

5. Don’t think you can time the market. During last fall’s market freefall, you may have found yourself thinking, “If only I’d gotten out of stocks in September and bought bonds instead.” If so, you’re not alone. The fact is, though, unless you’re a genius and you don’t have to do anything else but watch the market, timing the market is likely to be a fool’s errand.

“The danger in trying to do it is, not only do you have to be right when you get out, you have to be right when you get back in,” says Johnson. Suppose you’re in a fund indexed to the Dow Jones Industrial Average. The average is at 30,000, and you conclude that it’s going to be going down, so you shift all your money into a bond fund or a money market account. Then the average drops to, say, 27,500.

“It looks like a pretty good call,” Johnson says. But that’s where the tough question comes: Do you get back in now, only to see it drop still farther? Or do you hold off, and miss an opportunity to profit on a turnaround? If you happen to get it right once, you might be tempted to do that again in the future. The next time you may get it wrong.”

6. Know your risk tolerance. Skittish times are when investors discover how risk-tolerant they really are. “It makes more sense to make sure you have an allocation that you’re comfortable with, that you can sleep with,” says Johnson.

Some of that depends on your personality, but it also depends on where you are in the course of your career. The younger you are, the more you can afford a prudent risk in the form of an aggressive investment that may offer high growth potential but also a chance of a big drop.

The closer you are to retiring, however, the more conservative you need to be. Age 60 is not the time to put your whole nest egg in a highly speculative new technology fund, for example. Instead, an increasing share of your account should begin moving into fixed-income instruments such as bonds, bond funds, or CDs.

But not all of it. Retirement is lasting longer; someone who retires early, such as at 55, may need to live off those savings for decades. “A fairly sizeable amount of your portfolio still needs to be allocated to equities even as you go into retirement,” Johnson says. “The important thing is that you simply increase your liquidity over the immediate years, to avoid being forced to sell at the market low.

7. Diversify. To be sure, it’s smartest never to put everything into any one investment. Money managers typically recommend a mix of four to 10 kinds of investments: stocks, bonds, and other instruments, all chosen to balance risk and return to suit your temperament and circumstances.

The usual advice (and your own situation will determine your strategy) is to divide your assets among multiple classes. At the end of the year, when some have made a lot and others only a little, or even incurred a loss, you take your total assets and rebalance them so that once again they are properly divided.

8. Know what you can control — and what you can’t. “What investors can control is appropriate planning and liquidity for their personal life,” Johnson says. More control than that isn’t really attainable.

9. Buy low, sell high. It’s an old joke, but it’s also the most basic advice there is — a rule too many investors forget when they buy a high-flyer as it nears its peak or sell in a panic as the price collapses. “Be happy that prices are lower,” Johnson says. “When the market is down, a lot of people are tempted to stop contributing. That’s the last thing you want to do. This is the right time to consistently contribute, with a plan in place that takes the emotion out of it.”



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