Markets Got You Spooked?
Time for a reality check
Have the recent swings in the stock market disturbed your sleep? There are a lot of people searching for answers as they watch the market swing high, swing lo. They're second-guessing themselves and their advisors. They're frightened, angry, worried. If this sounds like you, it's time to take a deep breath and do a reality check.
The key to any portfolio's sleep quotient is how well mixed the assets are, and how well suited that asset mix is to your investment personality. When a bump, slump or galumph comes along in the market, that volatility is an opportunity to test your mix and your emotional commitment to your investment strategy.
Remember your investment strategy? It's the blueprint for your portfolio. It's the reason you bought XYZ stock, or LMN mutual fund to begin with. And along with the following steps, it's the path to a solid night's sleep.
Step #1: Review your tolerance for risk. You can have an asset allocation the text book says is okay, but if you're having a heart attack, that mix isn't for you". You need a calm rational approach to investing and sense of humor keep smiling as the market tiptoes, slip-sides, and waddles all over the investment map. In the very best case, while you may have had a moment or two of doubt, you're pretty much okay.
Step #2: Rebalance your asset-allocation. There are many ways to adjust your asset mix until you've figured out your very own recipe for sleep. If you're invested in equities and find the volatility too severe, it may be time to move somewhere safe - such as a money market fund - and tread water for a while till you decide where you want to invest next. However you're feeling, you should have a conversation with your broker or advisor. And if you get a, "Never you worry your little head" response, it may be time to find a new advisor.
Step #3: Dollar cost average. If you've been sitting on the fence counting sheep, wondering when to get into the fray, and think that the latest in a series of market corrections is your sign, be careful. It's false security to think that just because there's been a slide there won't be another one. It all comes back to dollar cost averaging: buying a little each month so that you aren't attempting to practice the nefarious art of market timing.
Step #4: Don't leverage. When people think they can borrow to invest and make a quick buck, they end up adding to their risk. Leveraging is one way to add more risk to your portfolio since a jump in interest rates will cause the cost of the loan to go up. And a decrease in the value of your collateral means the bank may call in that collateral. You could end up having to come up with extra money to meet your financing commitments. That's fine if you have extra money, but it's not fine if you have mortgaged the house or have to sell investments at a loss to cover your butt.
Step #5: Have a long-term horizon. Before you sell in a panic, you need to ask yourself why you want to sell. Is your stomach in knots? Do you feel like you've stepped in bear poop? Or have the fundamentals of your investment changed? The intrinsic value of a stock may be no different at $50 when you bought it than at $30 after a market correction. It's the market perception that has changed. If you believe holding that stock is a good investment for your portfolio over the long-term, stick to your buy-and-hold strategy.
Taking a long view is a sensible alternative to panic. And it's a less risky alternative to market timing. But don't deny your gut. Your flip-flopping stomach may be telling you that your asset mix is wrong. Take the time to review the realities of your investment strategies in light of the new information your adrenaline glands are sending. And if you find all in order, might I recommend a warm glass of milk before bed tonight.