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.
More about volatility and stock market decline:
Very good advice – I think the most important thing when making decisions about your portfolio is not to panic and have some good logic or reasons why you are making changes.
And of course, not making any changes is a good move too (usually).
Mike
In my opinion, there is absolutely no reason to sell.
If you’re investing in the market for the long term like you should be, this current market behavior will have no affect on your portfolio.
If you’re trying to day trade or hold things for a short term, you made a mistake before you even started and now you’re seeing exactly why what you did was a bad idea.
It’s that simple.
Nice post, well thought out. You addressed all the things that are important to look at, regardless of current market volatility. But this certainly is a good time to re-examine all of it.
One thing to add, having a financial plan in place helps investors to keep all of this market volatility in perspective. Knowing the answer to a question like: How does a 16% drop in my investable assets effect my projected retirement lifestyle is important.
Been trying to write a response to this post for almost an hour, but keep getting interrupted by client phone calls asking about what’s happening…
@FourPillars – Thank you. I wouldn’t call it advice. These are the things that I do myself, and not because of the market decline. I always go through the steps each time there is a major life event, and also in the December of each year.
“And of course, not making any changes is a good move too (usually).”
Definitely, if you started with a good plan in place.
@Kevin – “In my opinion, there is absolutely no reason to sell.”
I agree, selling is one of the worse reaction to down market. Unfortunately, that’s what a lot of people ended up doing.
@Ciaran – I look forward to your follow up post. Let me know when it’s done.
I am sure you’re getting a lot of phone calls today.
Solid advice. Hopefully people near retirement actually have enough diversified into cash, CDs, and bonds. And the rest of us have a while yet.
Thanks for mentioning my volatility primer, but mostly for pointing to the asset allocation tools. It’s about that time for my portfolio.
@Mrs Micah – Thank you.
“Hopefully people near retirement actually have enough diversified into cash, CDs, and bonds.” Agreed, but not too much still because most people still have another 15-25 years to go after retirement.
@Lily – You’re welcome.
Absolutely stay in the market if you’re under 50. The market always comes back. If it didn’t, I think we’d have bigger things to worry about.
ruff ride at the moment and for the next 12 months but something i’ll be riding out. I’m in for the long haul