One thing remains certain when investing: uncertainty. It’s what makes investing so difficult emotionally. Uncertainty and emotion seem to go hand in hand. While the long-term performance of equity markets has historically been a steady up trend, short-term direction is always unpredictable. Amid all of this misgiving about the market’s course, what should investors do? Here are a few suggestions to help take some of the emotion out of your decision-making process:
n Formalize your goals. As with the achievement of any goal, commitment to the goal is half the battle. Formalize your commitment to attaining your goals by writing them down, both short-term and long-term. Follow your progress by updating them at least annually. How else will you know if you are actually going to attain your goals?
n Stay balanced. A basket of eggs is better than just one. Build a well-diversified portfolio where different sectors will complement each other and may not always move in the same direction at the same time. It should comprise cash equivalents, bonds, equities and real estate and tangibles. Mutual funds can be a cost efficient way to invest while at the same time reaping the potential benefits of diversification. Your financial adviser will help determine how much weighting to give each category and how to sub-allocate within each given an individual’s time horizon and risk tolerance.
n Reassess risk tolerance. Amid market turmoil, investors may realize that they don’t quite have the stomach for stock market volatility they thought.
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Upon discovering your risk tolerance is much lower than imagined, move incrementally toward a more appropriate investment mix. Not everyone can withstand extreme stock market volatility, and shouldn’t have to.
A well-diversified portfolio generally helps to offset instability and can put investors on the path toward achieving financial goals.
n Invest in what you understand. If you do not understand how an investment works, you will not fully understand the risks associated with that investment. Is it really worth placing your hard-earned money in this type of investment? No.
n Count cash — liquidity is key. In the event of a market downturn, investors should determine how long they could go without selling stocks, considering income, pension, Social Security and cash and bond holdings.
This exercise can help bring the market’s short-term swings back into perspective and help re-focus long-term goals.
n Keep a diary. Consider keeping an investing diary. Investors sometimes suffer from selective memory.
They may remember thoughts of selling stocks right before a market downturn, but forget that they had that same thought many other times prior to the market’s rise. By keeping a diary, investors can see how often their instincts may be wrong.
n Know when to cut your losses. Many investors do not know when to get out of an investment. If your investment selection is heading south and most likely won’t return to previous form, face the music and consider getting out before your lumps get too big.
n Take advice from a financial coach. People have advisers for various aspects of their life, whether religion, athletics, tax or legal, among others. However, investing is one of the most difficult activities many ever undertake.
n Seek the advice of a qualified financial adviser for coaching through the ups and downs of the emotional investing roller coaster and remain focused on long-term goals.
Michael T. Ohlman, a certified financial planner, is a senior vice president, financial planning, and wealth management specialist in the Bradenton office of Raymond James & Assoc., Inc. He can be reached at (941) 907-0168 or Michael.Ohlman@RaymondJames.com.