Don't panic when the market falls!
What do you do when the Dow drops more than 500 points in one day? Above all ... don't panic! When you're investing for the long haul, short term swings in the market shouldn't bother you.
On this week's Money Matters, Greg Heberlein and Dave Meyer talk about how to weather volatile times in the stock market.
By the time a stock market reverses itself – either higher or lower – the average investor has little or no time to react. The biggest days of a reversal are the first few trading days. Not only do individual investors fail to react quickly enough, but most don’t sell until the bottom is in sight.
Protect your portfolios
The first option for how to protect your portfolio is to simply drop out – avoid the aggravation, the daily or hourly glances at stock prices, the heartburn that builds with each passing, losing day.
Then where does one put the money?
- In a savings account offering yields far below historical stock-market standards?
- In the safety of one-year Treasury bills that today yield 1/20th of what a decent dividend-bearing stock yields?
If you don’t have the patience to live through a disaster, these may be the best way to relieve the angst – no more guessing when to buy or sell.
Go on the defensive
Another option is to turn to defensive stock postures. Buy conservative, dividend-paying stocks that tend to go down less than stocks in general, and a lot less than the high-flyers. A good dividend-yielding stock today pays the investor 3 percent a year. As mentioned earlier, that’s 20 times what a one-year T-bill pays.
Another less risky method is to buy nearly all of the market. That’s done by investing in a Standard & Poor’s 500 index fund. You get a little piece of the stocks that reflect 97 percent of all listed U.S. stocks. That smooths out your gains and losses. You can get rich on the upside without hitting a home run. You can cut your downside losses without going bankrupt.
The index fund commonly outperforms nearly every investment adviser on the planet. There’s only one Warren Buffett, and even he occasionally stubs his toe.
Another path may be to permanently take some, but not all, of your money off the table. Put a quarter, a half or three-quarters of your money in bonds or other cash-like investments, depending on your age. As you get older, it’s logical to put a sizable portion of your assets as far away from risk as possible.
Or sit tight, taking solace in the fact that no downturn is forever, that stocks usually rise three of every four years. If you invest in a regular, methodical way, you’ll eventually be buying stocks on the way back up.
On the Web:
When it comes to sticking to an investment plan and happily ignoring the roller coaster ride in the stock market, Greg and Dave look to Bill Schultheis as a great role model. He's the author of The New Coffeehouse Investor: How To Build Wealth, Ignore Wall Street and Get On With Your Life. Bill's website is at www.coffeehouseinvestor.com.
“Money Matters” is a KPLU feature covering the economy, investments and more. The feature is published here and airs on KPLU 88.5 during Morning Edition and All Things Considered on the second and third Tuesdays of the month. It also airs on Weekend Saturday Edition.