Monday, June 23, 2008

Volatile Market Investing

It is easy to be complacent in a rising stock market. There is only one question they want answered and it is something like "What stock should I buy now?"

When the market reverses and starts a downward journey, that's the time investers begin urgently seeking answers to an entirely different set of questions. What should I do now? Do I hang in there? Sell everything and move to cash? Is this a buying opportunity? Should I temporarily move to the sidelines and then jump back in when the stock market turns around? How long is this down market likely to last?

Market declines can be unsettling and even outright scary. You've probably asked these questions at some point in your investing life. Hopefully, you have asked your financial advisor another sort of question: Can you help me construct my financial program to last and help me reach my long-term goals?

If you and your financial adviser have already created such a program, you likely already know the answers to the questions above. For the people who have set up a long-term plan, the best thing they can do is - nothing. Long-term investors in a declining market will do nothing that upsets their established program.

Go Back To Basics

Market declines present an opportunity to discover how solid your financial program is. Any weakness will show up. That’s why this is a good time to chechk on four basic investment fundamentals to help you survive a down market - and perhaps even take advantage of it.

Diversify

Spreading your risk by investing in a carefully selected mix of mutual funds that invest in stocks, bonds and money market instruments is a good idea any time. In the global marketplace we have today, consider diversifying into an international or global fund. Although the U.S. stock market has an impact around the world, other markets move in different economic and national cycles. While your U.S. stock funds may show losses, diversified international funds may lose less or even gain.

Keep a Long-Term Perspective

Time in the market is important - not timing. Diversified investment portfolios are not immune to a bear market, and it’s tempting to dump all your stock funds. Waiting in a money market account for better times seems like a smart thing to do, so you are ready to buy into the market when the recovery begins.

How do you know when the market recover begins? What day is the right day to buy more stock? If you miss the right time, you might lose a large part of the profits. If you had missed the 10 best days of the S&P 500 Stock Composite Index between January 1, 1990 and December 31, 1999 your return would been 41% lower than if you were in the market for the full 10 years.

Invest in Bad Times and Good

The single best way to invest regularly is called dollar cost averaging. This strategy calls for investing the same amount at consistent intervals, such as once a month, every quarter or even every pay period. By doing this, you don't have to try to guess which way the financial markets will move and you won’t be waiting around for the right time to buy.

Using the dollar cost averaging method is one way to take advantage of a down market. As you invest regularly, you end up buying more shares when the price is down. View a down market as an opportunity to buy good companies at lower prices.

Don’t Forget Those Dividends

Even when company share prices will be impacted by a bear market, this doesn’t mean that the companies themselves are doing poorly. Many companies pay dividends at the same rate during a bear market as during a bull market.

Market Declines Are Natural

A few facts that might help put market declines in perspective. Like the seasons, they are a natural part of the landscape. Since 1900, there have been 285 “routine declines” of 5% or more, 91 “moderate corrections” of 10% or more, 43 “severe corrections” of 15% or more and 26 “bear markets” of 20% or more. If that doesn't show declines are part of being in the stock market, then what will..

Even if you haven’t lived through a really tough bear market, you’ve probably seen a lot of volatility. When you chose a good financial adviser, you will be in good shape to withstand the next down market.


Roger Sorensen

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