Question of the week:I started investing for retirement in 1999 when everything seemed rosy. Now everything's going downhill and I have less than when I started! What should I do? --Susan G.
Dear Susan,
No doubt about it, this is the kind of market that tests an investor's mettle. It's tough to see your portfolio lose value, especially after the banner bull market years of the late 1990s.
We asked other members of the Armchair Millionaire community how they were holding up in the down market. The response was nearly unanimous: Stay the course.
Here are a couple of examples:
"I'm using the same techniques now that I used during the bull market: Keep making monthly investments into a broadly diversified portfolio of stocks and keep a long-term outlook." --Jerry
"I have made no changes in the way I invest over the past two years. If you start with a good solid plan, there is no reason to change it." --Bryan J.
We know that the market goes up and down from one day and one year to the next, sometimes with big, stomach-wrenching swings. But over longer periods of time, it only goes one direction: up.
Let's take a look back at how the market has performed historically.
Since 1926, the worst single year for large U.S. companies as measured by the S & P 500 was 1931, when it lost about 43 percent. Its best year was 1933, when it gained over 54 percent. Talk about volatility!
But step back a bit and look at 25-year periods between 1926 and 1999. During these periods, average annual returns ranged between 5.9 percent and 14.9 percent. And if you look at the entire period from 1926 to 1999, the S&P 500 returned an average of 11.3 every year.
Even if you keep a long-term perspective, it can still be difficult to prepare psychologically for the years when the market drops. Use my checklist of common sense steps to help ensure that your portfolio stays on track.
The Armchair Millionaire Checklist for Riding Out Market Downturns
Resist the impulse to sell. Selling into a down market will guarantee that you'll miss out on the inevitable market recovery. Do your homework--choose stocks or funds that are fundamentally sound and watch them to make sure they continue to match your goals and risk tolerance, then just hang on tight.
Maintain a diversified portfolio. There's more to the stock market than the Dow Jones Industrial Index and the NASDAQ. If you have a broadly diversified portfolio that includes large, medium and small cap stocks representing both international and U.S. companies, you'll minimize short-term volatility. For easy diversification, I'm a big fan of using index mutual funds.
Dollar cost average. This simply means investing the same amount of money on a regular basis (like monthly or quarterly), regardless of how the market is behaving. When the market's up, your money buys fewer shares. When it's down, it buys more. Over time, your average price per share will tend to be lower than if you had bought in large lump sums. (This technique works best with no-load, no transaction fee mutual funds.)
Tune out the noise. For every pundit forecasting the next great bull market, you'll hear another who is sure that we're in for continued doldrums. The truth of the matter is that no one can consistently predict the short-term direction of the market with 100 percent accuracy. Ignore the talking heads.
THE BOTTOM LINE: History teaches us that the best way for investors with long- term horizons to make money is to simply stay invested in stocks. Don't let emotion scare you into making moves that will derail your long-term investment success.
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