Nervous? While there are no magic words to remove that feeling in your belly every time you think about your investments, hopefully these tips will provide enough comfort to get a little shuteye at night. While much of our current economic condition is unprecedented, history teaches good lessons in dealing with market downturns.
Consider your time frame
If you have 10, 15, or 20-plus years before retirement, you should have little concern about short-term downturns. In fact, for a young individual, this is an opportunity to buy into a market we expect to eventually turn around.
For those who need funds soon or who are in retirement, the current market is less of an opportunity and more of a threat. However, you must also consider the threat of inflation and the threat of selling out of equities at their low points. While it might be tempting to “go all cash,” some stock exposure might be necessary to keep your portfolio diversified and strong for the retirement years ahead.
Stay in the market
It is dangerous to sell off equities when you might be selling at the lowest point. Principal Financial Group explains that missing some of the best days in the market because of nervous sell-offs can have a detrimental effect on your overall return. Consider this example:
An individual who was invested in the S&P 500 from January 1, 1997, to December 31, 2007, would have turned a $10,000 investment into $21,789 for an average annual return of 8.10%. Alternately, an investor who panicked and sold their positions during this same period and missed the 10 best trading days would have seen their return fall from 8.10% to 3.58%.
The point is, no one can time the market. No one knows when the bottom will hit or when things will turn around. You want to be in the game when the turn around comes.
Diversify, diversify, diversify
Those who are feeling the most pain are likely those whose portfolios were not diversified appropriately at the start of the downturn. Your portfolio should be a mix of equities of different sectors (retail, financial, manufacturing, consumer staples, etc.), geographical areas, size (small companies, large companies), and bonds or fixed income. Employees should never hold too much of their own company stock, even if you think your company is the most profitable and wonderful place in the world. Think Enron.
Use your team
If you have a financial planner, CPA, or other advisor, make the “comfort call” and discuss your accounts. Even if no changes are made, the comfort it might bring is worth the call.
PERSONAL FINANCE Q&A
Q: I would like to know where a person can receive an 8% return for their money. I read these articles that say if you save so-and-so amount in so many years at 8%, you will receive this much money back. Can you inform me as to where that can be accomplished?
A: The 8% comes from the historical returns of the stock market. The S&P 500 from December 1925 to December 2007 has returned around 10%. Therefore, 8% is an approximate return assuming one has a diversified portfolio of various investments and holds on to them for a long time frame. Work with a reputable financial institution or talk with your bank to learn how to set up a diversified portfolio of stocks. Go online to www.cfp.net to find a certified financial planner in your area.
The December 2008 Money Matters column, which included a sidebar with advice on how to check the qualifications of various professionals, listed incorrect information for checking CPA credentials. While a voluntary and very active organization, an inquiry to The American Institute of Certified Public Accountants or any of the state societies will not provide an insight into whether a person is credentialed as a CPA.
The licensing authority and requirements for CPAs fall under the auspices of the Board of Accountancy for the state or jurisdiction in which a CPA practices. A search for those currently licensed as a CPA in Kentucky can be conducted by going online to www.cpa.ky.gov and clicking on the link “CPA Licensee Search.”
Thanks to reader Barbara K. Bryant-Hancock, CPA, for providing this correction.