Smooth Sailing Through Stormy Markets
Warren Buffet has advised investors, “Remember that the stock market is manic-depressive.” This is especially true during volatile periods. The stock market will go through short irrational ups and downs, and even experienced professionals won’t be able to figure out what is going on. History shows that the biggest losers will be investors who panic and sell on bad news. It may help to remember that investors who stayed in the market from May 1932 through May 1937 got the best five year returns in history — all during the Great Depression.
What is Dollar Cost Averaging?
According to many financial experts, the best way to get through an erratic market is to use dollar cost averaging, also known as a constant dollar plan. A 401(k) plan is a good example. Using this strategy, the investor chooses a steady amount and invests it every month. Imagine an investor who puts $100 a month into a well-diversified mutual fund. The $100 will buy more shares during market lows and fewer shares during market highs, so returns will be close to the market average.
Strategies for Different Age Groups
In a volatile market, it is especially important to make sure that investments are diversified among different economic sectors, with both domestic and international investments. Younger investors should continue to make regular investments in the stock market, since they can afford to wait for a recovery. Investors who are retired or nearing retirement should consider a more conservative strategy. In most cases, they should retain their current stock market portfolio but keep new investments in cash, preferably in an online savings account with a good interest rate. These cash holdings will act as a cushion in case the market takes a long time to recover.