Advice for investors during crazy stock market volatility
Stocks are volatile, but don't give up hope.
If you haven’t figured this out by now, it’s time you did: Stocks are risky. They are risky — as in volatile — over the short and the long term.
But that doesn’t mean you should avoid investing in stocks ... except maybe Chinese stocks. Nor does it mean that you should just ride out the jaw-dropping volatility in the market, either. What to do?
• First, turn off the TV. Joseph Tomlinson, a certified financial planner with Tomlinson Financial Planning, in Greenville, Maine, suggests "turning off CNBC" and not reacting to these sorts of events by trying to time the market. "Don't attempt a strategy of bailing out temporarily until things 'calm down,'" he says.
• Second, think big picture. The longer your investment time horizon the more likely it is that you can not only ride out this current crisis, but continue to invest in stocks as they go “on sale,” as some investment experts like to say during times like these. People today can expect to live on average to nearly 80. So someone in their 20s has an investment time horizon of at least 60 years, and for someone in their 40s its four decades. And, while past performance, as the famous investor warning goes, does not guarantee future results, stocks over the long term have gained on average 10% to 12% per year since the late 1920s.
“Millennials shouldn’t be concerned with volatility,” said Dirk Cotton, a financial adviser and author of the Retirement Caf? blog in Chapel Hill, N.C. “They have decades to recover from losses, and risk enables them to earn higher returns.”
On the other hand, pre-retirees — those in their 50s and early 60s — as well as retirees have shorter investment time horizons, say 20 or 30 years, and can’t afford to put their retirement lifestyle at risk. They just don’t have as many years to recover from bear markets as do Millennials and Gen Yers. So they might revisit how much they invest in stocks.
As a general rule, consider subtracting your age from 100. That should tell you how much to invest in stocks. So, if you’re 50, consider investing 50% in stocks and 50% in bonds. And if you’re 25, consider investing 75% in stocks and 25% in bonds.
• Third, review (or create) your investment policy statement. Investors, no matter their life stage, should always have an investment policy statement (IPS) for their portfolio. It's a blueprint outlining how much to invest in stocks, bonds and cash given their time horizon, risk tolerance and investment goals.
Your IPS — not your emotions — should tell you when to rebalance your portfolio, when to sell and buy. Again, regardless of life stage, the tumult in the Chinese market, might be a chance to buy, not sell, stocks.
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