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LinkedInTo sell or not to sell? What to do when the stock market drops
If you've been following the dramatic up's and down's of the stock market in recent weeks you may be worried (almost everyone I know is!)
What should you do now? Get out of the stock market altogether? Hang on? Or, buy more stock while it is "on sale" as a result of recent declines.
Since I'm not a qualified investment advisor, let me pass on 3 time-honored recommendations from someone who is: Jill Schlesinger, of CBS Money Watch.
1. Don't make any rash decisions.
When the market tanks, some investors hurry to unload their stock (including stock invested in their retirement plans) and their “paper losses” turn into actual losses. But, is that that a good idea?
Cooperative Extension financial specialists advise investors not to react to daily investment performance indicators. Instead, they emphasize the importance of keeping the long-term view on your investments and recommend not selling a stock (or in this case divesting the investment from your retirement account) unless it has underperformed the market for a least a year.
Financial advisor, Steve Vernon says the best approach is to "do nothing at all”. As evidence he cites a recent report from Fidelity Investments about the actions and investment outcomes of retirement plan participants since the 2008-2009 downturn:
Analysts discovered that retirement plan participants who maintained a balanced portfolio (that included stock) for the entire period (from the fourth quarter of 2008 through the second quarter of 2011) realized earning of 50% or more. But, participants who changed their stock allocations to zero percent between Oct. 1, 2008, and Mar. 31, 2009 and maintained this allocation through June 30, 2011, experienced an average of 2% growth in their accounts.
2. Maintain a diversified, balanced portfolio.
According to experts, asset allocation accounts for 90% of earnings on an investment portfolio. (Portfolio” refers to the collection of investments, including cash, CDs, stocks, and more that someone owns.)
When the market is volatile---values are going down (or up) rapidly---maintaining a diverse portfolio means you don't put all your eggs in one basket. Instead, continue investing in different classes of assets (stocks, bonds, cash or real estate) and choose different funds within classes (such as domestic stocks, international stocks, corporate bonds and municipal bonds, etc.) and different industries (such as high tech, health care, and agriculture).
If one asset class or fund loses value, you still have other others and don't lose your entire investment.
3. Stick to you "game plan"---it may be a good time to rebalance your asset allocation.
Your "game plan' refers to your asset allocation. If you have chosen a diversified, balanced portfolio based on your long-term goals and risk tolerance, then short-term changes in the stock market shouldn't affect your plan.
If the downturn makes you realize that your current asset allocation is too risky, one possible strategy is to leave the portfolio as it is and put any new saving retirement savings in less aggressive investments.
Over time major changes in the stock market can change the actual make-up of your portfolio. For example, if stocks go down in value, then they make up a smaller percentage of the total portfolio. If you believe your original allocation was appropriate, then major changes in the stock market could indicate it's time to rebalance your holdings.
Tip: Before selling or buying, consult a financial advisor since there may be fees or other factors to consider. Some investment companies will rebalance an account for you.
So what should an investor do at times like this?
Do as the British government exhorted its citizens at the beginning of World War II: Keep calm and carry on.”
