Words to ponder
"Investors should remember that excitement and
expenses are their enemies. And if they insist on trying
to time their participation in equities, they should try to
be fearful when others are greedy and greedy when
others are fearful."
— Warren Buffett
"Most of the time common stocks are subject to irrational
and excessive price fluctuations in both directions
as the consequence of the ingrained tendency of most
people to speculate or gamble ... to give way to hope,
fear and greed."
— Benjamin Graham
"In this business if you're good, you're right six times
out of ten. You're never going to be right nine times out
— Peter Lynch
Remember that while they're sound strategies, diversification, asset allocation, and dollar cost averaging can't guarantee a profit or eliminate the possibility of loss. All investing involves risk, including the potential loss of principal, and there can be no guarantee that any investing strategy will be successful.
Eleven Ways to Help Yourself Stay Sane in a Crazy Market
your cool can be hard to do when the market goes on one of its periodic
roller-coaster rides. It's useful to have strategies in place that prepare you both
financially and psychologically to handle market volatility. Here are 11 ways to
help keep yourself from making hasty decisions that could have a long-term impact
on your ability to achieve your financial goals.
1. Have a game plan
Having predetermined guidelines that recognize the potential for turbulent times
can help prevent emotion from dictating your decisions. For example, you might take
a core-and-satellite approach, combining the use of buy-and-hold principles for
the bulk of your portfolio with tactical investing based on a shorter-term market
outlook. You also can use diversification to try to offset the risks of certain
holdings with those of others. Diversification may not ensure a profit or guarantee
against a loss, but it can help you understand and balance your risk in advance.
And if you're an active investor, a trading discipline can help you stick to a long-term
strategy. For example, you might determine in advance that you will take profits
when a security or index rises by a certain percentage, and buy when it has fallen
by a set percentage.
2. Know what you own and why you own it
When the market goes off the tracks, knowing why you originally made a specific
investment can help you evaluate whether your reasons still hold, regardless of
what the overall market is doing. Understanding how a specific holding fits in your
portfolio also can help you consider whether a lower price might actually represent
a buying opportunity.
And if you don't understand why a security is in your portfolio, find out. That
knowledge can be particularly important when the market goes south, especially if you're considering replacing your current
holding with another investment.
3. Remember that everything is relative
Most of the variance in the returns of different portfolios can generally be attributed
to their asset allocations. If you've got a well-diversified portfolio that includes
multiple asset classes, it could be useful to compare its overall performance to
relevant benchmarks. If you find that your investments are performing in line with
those benchmarks, that realization might help you feel better about your overall
Even a diversified portfolio is no guarantee that you won't suffer losses, of course.
But diversification means that just because the S&P 500 might have dropped 10%
or 20% doesn't necessarily mean your overall portfolio is down by the same amount.
4. Tell yourself that this too shall pass
The financial markets are historically cyclical. Even if you wish you had sold
at what turned out to be a market peak, or regret having sat out a buying opportunity,
you may well get another chance at some point. Even if you're considering changes,
a volatile market can be an inopportune time to turn your portfolio inside out.
A well-thought-out asset allocation is still the basis of good investment planning.
5. Be willing to learn from your mistakes
Anyone can look good during bull markets; smart investors are produced by the inevitable
rough patches. Even the best investors aren't right all the time. If an earlier choice now
seems rash, sometimes the best strategy is to take a tax loss, learn from the experience,
and apply the lesson to future decisions. Expert help can prepare you and your portfolio
to both weather and take advantage of the market's ups and downs. There is no assurance that working with a financial professional will improve investment results.
6. Consider playing defense
During volatile periods in the stock market, many investors reexamine their allocation
to such defensive sectors as consumer staples or utilities (though like all stocks,
those sectors involve their own risks, and are not necessarily immune from overall
market movements). Dividends also can help cushion the impact of price swings.
7. Stay on course by continuing to save
Even if the value of your holdings fluctuates, regularly adding to an account designed
for a long-term goal may cushion the emotional impact of market swings. If losses
are offset even in part by new savings, your bottom-line number might not be quite
If you're using dollar-cost averaging — investing a specific amount regularly regardless
of fluctuating price levels — you may be getting a bargain by buying when prices
are down. However, dollar cost averaging can't guarantee a profit or protect against
a loss. Also consider your ability to continue purchases through market slumps;
systematic investing doesn't work if you stop when prices are down. Finally, remember that the return and principal value of your investments will fluctuate with changes in market conditions, and shares may be worth more or less than their original cost when you sell them.
8. Use cash to help manage your mind-set
Cash can be the financial equivalent of taking deep breaths to relax. It can enhance
your ability to make thoughtful decisions instead of impulsive ones. If you've established
an appropriate asset allocation, you should have resources on hand to prevent having
to sell stocks to meet ordinary expenses or, if you've used leverage, a margin call.
Having a cash cushion coupled with a disciplined investing strategy can change your
perspective on market volatility. Knowing that you're positioned to take advantage
of a downturn by picking up bargains may increase your ability to be patient.
9. Remember your road map
Solid asset allocation is the basis of sound investing. One of the reasons a diversified
portfolio is so important is that strong performance of some investments may help
offset poor performance by others. Even with an appropriate asset allocation, some
parts of a portfolio may struggle at any given time. Timing the market can be challenging
under the best of circumstances; wildly volatile markets can magnify the impact
of making a wrong decision just as the market is about to move in an unexpected
direction, either up or down. Make sure your asset allocation is appropriate before
making drastic changes.
10. Look in the rear-view mirror
If you're investing long term, sometimes it helps to take a look back and see how
far you've come. If your portfolio is down this year, it can be easy to forget any
progress you may already have made over the years. Though past performance is no
guarantee of future returns, of course, the stock market's long-term direction has
historically been up. With stocks, it's important to remember that having an investing
strategy is only half the battle; the other half is being able to stick to it. Even
if you're able to avoid losses by being out of the market, will you know when to
get back in? If patience has helped you build a nest egg, it just might be useful
11. Take it easy
If you feel you need to make changes in your portfolio, there are ways to do so
short of a total makeover. You could test the waters by redirecting a small percentage
of one asset class to another. You could put any new money into investments you
feel are well-positioned for the future, but leave the rest as is. You could set
a stop-loss order to prevent an investment from falling below a certain level, or
have an informal threshold below which you will not allow an investment to fall
before selling. Even if you need or want to adjust your portfolio during a period
of turmoil, those changes can — and probably should — happen in gradual steps. Taking
gradual steps is one way to spread your risk over time, as well as over a variety
of asset classes.