Coping With Market Moves
Submitted by Larry Frank Sr. on Fri, 06/06/2014 - 3:00pm
When markets near high records, you wonder, “Is this a bubble?” When
markets dive, you wonder, “Is this a crash?” Your biggest question: How
do you keep your head on the recent Wall Street rollercoaster?
After one of the markets’ worst Januarys in years, both the Dow Jones
Industrial Average and the Standard & Poor’s 500 recently notched record
highs – enough whipsawing to make your neck and your retirement
There’s an effective medium, though, between doing nothing and panicky
trading. These guidelines can keep you level-headed even while the
markets twist and turn (which they always will).
Revisit or develop your investment policy statement. An IPS describes
procedures, your investment philosophy and style, guidelines and
constraints for you or your advisor to manage your investments. An
IPS serves as your guardrail so you don’t veer all over, chasing
investments or changing your strategy as markets change.
To begin creating your IPS, write down your key investing goal and the
year in which you hope to reach it. If this goal will take you years (such as
funding your retirement or paying for a child’s college education), try to
figure your own longevity – then add a few more years. Quantify how
much your goal costs and remember to adjust the cost upward to reflect
inflation’s likely future impact.
Next, set your asset allocation targets for investments. Your IPS needs to
fix a range for your asset allocation rather than a static figure for each
class; this increases your options for making investment decisions if the
markets rise or dip just a little.
Finally, document specifically the market conditions that will spur you to
make investment decisions. That way you’ll know what to do and exactly
when – not just when your emotions move you.
Use indexes. These are diversified buckets of holdings that follow
general market rises and falls. The odds of all the companies going to
zero at the same time in an index are slim. The odds of one or a few
companies dropping to zero at the same time are even greater.
You may reduce your worries about losing your money – although index
value still goes up and down – as well as grow comfortable with
changing values and learn how to rein in your exposure to those
Investing in more than one index is also a basic part of protecting your
portfolio with diversification and asset allocation (two different tactics).
Forget about predicting the future. Correctly guessing one event is
lucky. Nailing 10 events – that’s prediction. Nobody accomplishes that
regarding the markets.
Approach investing with no predictions: Being wrong can carry huge
Develop a prudent plan. Include structured processes with decision
rules to guide you and that already consider markets always going up
and down. The degree of ups and downs you weather depends largely
on your tolerance and capacity for risk.
Customize your portfolio. Base it on the principles above and tailor it to
you and your situation. Don’t invest based on chit-chat around the water
cooler, structuring financial moves based on someone else’s situation
and needs. To do so sends you chasing investments that are merely hot
and not necessarily what’s prudent for you.
Combining and using these principles can provide you some comfort
during any market.
Follow AdviceIQ on Twitter at @adviceiq.
Larry R. Frank Sr., CFP, is a Registered Investment Adviser (California)
in Roseville, Calif. He is the author of the book, Wealth Odyssey. He has
an MBA with a finance concentration and B.S. cum laude in physics with
which he views the world of money dynamically. He has peer-reviewed
research published in the Journal of Financial Planning.
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