Market ups and downs are challenging, to say the least, for many investors. Chances are, you are saving for retirement and therefore are a long-term investor. Your long-term investment strategy should still depend on revisiting a few fundamental investment concepts every 6 to 18 months, regardless of market conditions.
Revisit Your Risk Tolerance
What level of investment risk is suitable for you? Are you still an aggressive investor, or has your personal situation changed since the last time you evaluated your risk tolerance? Are you still a long-term investor, or are you getting close to retirement and therefore need to be more conservative?
If your needs have not changed and you still are investing for the long term, this may not be the time to change your investment mix.
Don't Chase Returns
How many people do you know that bought into the “hot stock” they read about on the Web or saw on T.V. after they had already had significant returns? Many investors didn't evaluate how much risk was appropriate for their portfolio, and instead, chased after higher returns and turned a blind eye to the very real possibility that these stocks or funds were overvalued.
Diversify
Every asset class (investment category) has its day in the sun. If your portfolio is well diversified, you will be in good position to benefit when an asset class excels — as opposed to chasing returns after the fact. For example, when growth stock funds were excelling, value funds were not; or, when stock funds declined, bond funds did well. When technology funds slip, Blue Chip funds may perform well.
Over the course of time, a well-diversified portfolio can provide increased performance while decreasing risk. In addition, diversification provides a disciplined approach to investing, and helps to minimize emotional decisions.
Keep Investing Through Payroll Deduction
When the market is down, you are buying more shares or units for your dollars. Investors should actually feel good about buying in when the market is low. Remember the old saying "buy low and sell high." Ideally, when you reach retirement you will be selling high.
Invest for the Long Haul
Remember your long-term goals and invest for the long haul, rather than for short-term market swings. Statistics show that staying the course, rather than switching in and out of funds, is typically the wiser choice. Often, investors make the mistake of selling when the market is declining, and buying back when it is going back up. This is just the opposite of what they should be doing!
What About Current Events?
The uncertainty surrounding current events poses significant challenges for investors. One thing we do know: the stock market hates uncertainty. Thus, having diversification of investments is key! A mix of investments—cash, bonds, stocks—will help minimize the risk of a large loss.
Below are initial and long-term reactions of the Dow Jones Industrial Average to other major national crises.
