1. When the surf’s up, ride the waves.
Dramatic fluctuations in the stock market allow you to “buy the dips”. With stock prices so volatile, prices may be down next payday when you contribute to your 401(k) plan. This means that you’ll be getting more shares for your money. Let’s say that you contribute $500 into a stock fund in your 401(k) each month. If the market is down on payday, shout “Hooray!”-you’ll get more shares for your money than if the market were up in the clouds. It’s like going shopping and finding that everything you like is on sale.
2. Buy low, sell high.
We have a natural psychological tendency to want to invest in the winners. In reality, economic cycles show that you should take the opposite tack. If bonds and real estate have already gone up, and stocks have gone down, maybe it’s time to buck that trend. Will real estate go higher? Possibly, but it’s unlikely you’ll see a strong surge similar to what we’ve experienced over the past few years. So real estate will probably level off, and stocks are poised for recovery. For the long-term, stocks may be a better long-term investment right now.
3. Don’t run for shelter.
Hunkering down is a good idea when a tornado or hurricane is approaching, but it’s bad advice for a long-term investor. If you sell, you may miss the party later. Stocks tend to go up rapidly at the beginning of a market recovery. So, generally it’s more important to be in the bull market from the beginning than it is to avoid the bear markets. For example, for the 10 years 1992 to 2001, the S & P 500 returned 175%. But if you were on the sidelines and missed the five best days out of that ten-year period, your returns would have been 117%– a difference of 58%! And if you missed the 10 best days during those 10 years, your return would have dropped to 79%.
4. Stash cash.
You don’t want to be cash poor and have to sell assets when they’re down to fund your needs. A bear market rarely lasts more than three years, so keeping three years of liquid funds is wise. If you need cash to supplement your income, buy a house or send a child to college in a year or two or three, stay in liquid money market accounts or CDs. To pay for short-term needs, you should be more concerned with return of your money than return on your money.
5. Stop, look, and listen.
Stop worrying, look at where you are now, and listen to the advice of a trusted financial advisor. Coming up with a sound financial plan is just the thing to get you on track and moving toward the future when you feel you’ve lost your way.