Do you feel heat from financial meltdown? Let’s make the downfall in your favor.
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As our stock-broker account is getting down everyday. What do you thing that we could have done to minimize the downfall? This is very tricky situation and let me tell you; it all depends on individual circumstances.
What is my thinking process? I would not bailout at this point; it’s too late to do so because it’s already gone and there in no magic to get back. However, if I have a plan to buy a high-ticket item, for example, buying a house or college fees for kids in next 1-2 years or so then I would definitively move some chunk of money from stocks to high-yield savings.
However, its very painful situation for those who are planning to retire in 2-3-5 years as it’s not easy to see big red dent in monthly statement. With all due respect, at the same time, don’t you think it’s a mistake on your part to have big chunk of your portfolio in high-risk stock market instead of high-yield savings/MM account when you are close to retire age? The blame actually goes towards poor asset allocation in 401(k)/IRA/Roth IRA account.
== So what’s the lesson that you (younger people) can learn? ==
1 - Asset allocation:
We all know that diversification is the key but at the same time we are forgetting the risk tolerance. If you are young (in 30s) it’s okay for now to have major portion of your portfolio in high-risk stocks (aggressive approach.) and should phase out as age progresses. Older you are less aggressive (more conservative) approach you should take verses younger you are more aggressive (less conservative) approach you should take. Bottom line: Diversify across and within the different asset classes and frequently (one or twice in a year) assess your risk tolerance relative to your time horizon and align the plan to personal situation in near future. See interesting article: The Benefits of Diversification
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Now a days many brokers are offering Target Retirement fund (also known as life cycle funds). Target retirement funds are designed to make savings for retirement easier by offering a one-shot, premixed diversified portfolio that grows aggressive to conservative as the year passes. Simply choose the fund/plan that is close to your retirement date. See the benefits-of target retirement funds.
2 - Take a long-term approach:
If you see the stock market history of last 10-20 years, you will find uptrend in longer term. Few years where market goes down and some years it went up but net effect is up-trend for sure. So take a long-term approach (at least 5 years) rather then panicking in immediate down-fall.
3 - Add more to your investment:
Yes as market goes down every day, its difficult to swim up-stream and be bold and different. I know it’s against general emotions but if you are younger why not take the situation as an opportunity and add a bit to your investment as stock market goes lower. I guess its most efficient way to invest. If you have employer sponsored 401K plan or any other retire plan then now might be a great time to INCREASE your 401k contribution. (Reference: thinkyourwaytowealth.com) I am planning to top-off my IRA account for year 2008 contribution and advising my wife to contribute more towards her 401K plan. See this related post written by Jeremy @genxfinance.com: Don’t Compound Your Investment Losses by Investing Less in Down Markets and More in Up Markets
According to Ben Stein; he mentioned in his recent article: Recession-Proof Your Investment Strategy — To put this as plainly as possible, this is a good time to buy stocks. The evidence is overwhelming and consistent that if you buy when stocks’ P/E is below its 15-year moving average, you’ll make far more money than you would if you bought at the economic peak, when P/E’s are high. So, unless you’re out of money to buy with during the recession, you buy. You don’t go on margin to buy, and you don’t re-mortgage your home to buy. But if you’re employed and have money to invest, you buy.
4 - Save something for emergency cash/fund:
It’s a cash works as a safety net just in case something expensive (unexpected – job loss, injury, illness) happens. Read this excellent article “How to Prepare With an Emergency Cash Fund” and
“How and why to start an Emergency fund” from JD at getrichslowly.org
5 - Start Early – it’s never too late to start.
Start investing early — as I mentioned earlier, long-term market trends are up and (magic of ) compounding can work in your favor. Compounding interest means interest on an investment’s interest, plus previous interest.
Albert Einstein put it very simply: “There is no greater power known to man than compounding interest.” Compounding is more powerful than nuclear energy.
See below example of power of compounding interest: Three investors, each of whom invests $1,000 a year until age 65 However, one begins at age 25, investing a total of 40,000; one at age 35, investing a total of 30,000; and one at age 45, investing a total of 20,000. Each earns 7 percent per year. Now see below graph, what they have earned at age of 65.
Start investment early
You might have heard that best time to plant a tree is 20 years ago and second best time in now. Same things applies for investment. Even if you think you are late, you still have time to accomplish your retirement (reasonable) goal. Use this calculator to find out how much you have to save today in order to finish goal line.
“We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.”
– Warren Buffett
So what do you think? What is your thought? Are you fearful? Or are you eager to invest more with wisdom and knowledge? Please comment and share your thoughts.
Stock market crash, Feeling red?
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