You’re probably aware that the stock market fell 400 points last week. How did you handle the drop? Did you panic and sell, or did you hold tight?
Market cycles are normal and should be expected. You shouldn’t allow your emotions to influence your investing decisions. Remember these important points when making investment decisions:
Diversify to reduce risk. Spread your investments among various asset classes (stocks, bonds, cash) based on your goals, time frame and risk tolerance. If your portfolio is properly diversified, a decline in one asset type will be balanced out by a gain in another asset type.
Focus on long term goals and your overall portfolio. Short term blips are insignificant if you are investing for 10, 20 or 40 years. In addition, it’s more important how your overall portfolio performs than how each individual investment performs. Remember, 90% of your investment return is determined by how your portfolio is allocated, rather than the individual investments you choose.
Make market fluctuations work for you. If you are in the accumulation phase, take advantage of a market drop to buy investments. Remember the old adage “buy low, sell high”? The best time to buy low is right after a market drop. If you are close to retirement, use market fluctuations to evaluate your portfolio for appropriate risk tolerance and diversification. If the drop in your portfolio was more than you can tolerate, consider rebalancing to an asset mix that is more appropriate for you – however, don’t make any rash decisions; wait a few days and use dollar cost averaging so that you don’t sell low and buy high.