Smart strategy can ride out market downturns
Vail, CO, Colorado
If you’re an investor, you may have been disappointed with how the markets have reacted this summer to the news of high oil prices and other short-term events. Nonetheless, your long-term financial goals don’t have to be jeopardized by these losses ” if you know how to respond to them.
Here are a few moves to consider:
– Stick to your investment strategy. It’s almost always a bad idea to make long-term investment decisions in response to short-term market fluctuations. If you have built a diversified portfolio of quality investments, you’re better off “staying the course” during a market decline.
If these investments were suitable for you before the market drop, they should still be appropriate when the market turns around.
– Don’t try to time the market. It would be great if you could know when the market has reached its low or high point, or which days would be losers and which ones winners. If you had that foresight, you could always jump into and out of the market at the right times.
Unfortunately, no one can make those predictions with any accuracy. And those people who do try to time the market in this manner end up jumping at the wrong times and missing both short- and long-term market rallies. By staying invested through market ups and downs, you can help make progress toward your long-term goals.
– Look for buying opportunities. By definition, a market decline means that stock prices are cheaper ” which means you may find some good buying opportunities. Of course, you’ll want to know if a stock’s price is down because of the effects of the broad-based market decline or because of other factors specific to the company, such as poor management, non-competitive products or a decline in the industry to which it belongs.
While making these moves can help you get past the market decline, it doesn’t mean that a severe price drop can’t affect you. If you need money to pay an unexpected expense, such as a major car repair, a new appliance or a big medical bill, you’ll likely take a hit if you have to sell stocks when the market has fallen substantially.
You can avoid this problem by putting six to 12 months’ worth of living expenses in an emergency fund, preferably a “cash” or “cash-equivalent” account. In fact, such a fund can always help you avoid dipping into your investments, whether the market is down or up.
Nobody likes to see big declines in the stock market. But if you’re a long-term investor who has built an emergency fund and rebalanced your portfolio according to your risk tolerance, you’ll be in a much better position to withstand these market drops ” and you’ll be well-prepared for an eventual recovery.
Charlie Wick, Tina DeWitt and Todd DeJong are financial advisers with Edward Jones Investments. They can be reached in Eagle at 970-328-4959, in Edwards at 970-926-1728 and in Avon at 970-845-1025.