With the recent stock market volatility, I am sure many of you are having second thought about the stock market. Some may even ask, “Should I get out of the stock market?” or “Should I take my money out of the stock market?” The answer is it depends. Personally, I am holding steady and continuing to invest for the long-term. I can do this because I have the right asset allocation and investment mix for my investment time horizon and risk tolerance.
Did you take one of those risk tolerance tests way back when? Did you get a rating like “aggressive investor” or “very aggressive investor”? Now fast forward to 2008/2009, is the current market volatility and stocks sell-off making you nervous and you’re second guessing yourself? If the answer is yes, then this might be a good time to re-evaluate your risk tolerance level. Whether it was a long time ago, or you were overly optimistic, it’s normal for your risk tolerance profile to change with time.
Understanding your current risk tolerance level and where you stand is a good place to start.
Even if you are still optimistic and your risk tolerance level still says you are an “aggressive investor,” you should determine if your time investment horizon changed from the last time you considered it. This is not only about age. Your life situation and financial priorities could have changed — e.g., you’re getting married, saving money to buy a house, having a child, going back to school, etc.
As your life situation changes, you may have to adjust your investment strategy to fit the current needs.
Does your asset allocation align with your risk tolerance level and investment time horizon? If you have been religious about rebalancing of your portfolio, but haven’t considered risk tolerance level and investment time horizon for a while, this may be a good time to take a good look at it.
Here is an Asset Allocation Calculators from CNNMoney.com to help you with your allocation. Does your current investment mix in line with the ideal asset allocation?
Does your investment consists mainly of individual stocks? If it does, I recommend that you read Wise Investing Made Simple: Larry Swedroe’s Tales to Enrich Your Future by Larry Swedroe. Larry believes that the best investment strategy is to be a disciplined, long-term, buy-and-hold investor that utilizes globally diversified portfolio of low-cost, no-load, and passively managed funds and ETFs. I also believe in this strategy.
Now let’s take it a step beyond the typical diversification when we think about investment — i.e., stock vs. bond, large-cap vs. small-cap, domestic vs. international, value vs. growth, etc. Do you have other types of investment that are generating alternative income, or appreciating in value? For example:
Do you believe your investment portfolio is diversified?
You shouldn’t let emotion drive your actions. The worse thing you can do is check the stock market daily and react to every ups and downs. However, there are practical investment tactics that you could consider:
Stay in stock market or get out? It’s tough. I know watching your hard earned money going down the drain is hard. However, it’s better to act with reason, than to react with emotion.
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