It’s been more than 10 years since the great stock market crash of 2008, and the recent market volatility has made some people jittery – especially considering stock indexes can seemingly plunge hundreds of points in a matter of hours.
Those same nervous people ask: Are we due for yet another financial crisis; and perhaps not just a momentary dip, but a long-term downward trend that will hurl the country into a bear market and another recession?
Some people may even wonder whether it’s time to get their money out of the market.
It’s natural to have questions, but it’s important to understand that the answers won’t be the same for everyone, so the last thing you want to do is panic. Your decisions should be based less on what’s happening in the market at any given moment and more about where you are in your life personally.
Let’s face it, people have challenges managing their finances every day. It’s not just stock market swings that create angst. Fluctuating interest rates, taxes, debt and inflation all play a role, and the effects can be unsettling.
Market corrections and bear markets, after all, are just part of the game. Corrections – a drop of at least 10 percent from the market’s recent high – actually happen fairly often. On average, they occur about once a year and a bear market, which is a 20% downturn, happened on average every 3 ½ years from 1900 to 2015, so there’s no need to get overwrought with every hiccup in the market.
Let me offer a few suggestions on how you should be weighing where you are with your investments – and your life:
Take stock of your situation. Don’t let the market’s ups and downs panic you, but do let them be a reminder that you might want to assess whether you have the right investment balance. This is especially important if you’re within five to 10 years of retirement or you are already retired. Consider what percentage of your money is in accounts with more risk, such as the stock market, and what percentage is in accounts with less risk. Some people in or near retirement may be tempted to stick with high-risk investments, but they need to realize they don’t have decades to recover if their portfolio takes a major hit. On the other hand, time is on your side if you are a younger investor. You are better situated to ride out a dip and wait for the market to head back up again.
Know yourself and your risk tolerance. People make mistakes when they let emotions rule their investing decisions. You can get so excited about a bull market that you take too many risks and put your finances in danger. You can also let yourself become so high-strung about the potential for losses that you stash all of your money into low-risk accounts that pay little interest, and you miss out on excellent opportunities to grow your portfolio while also losing out to inflation. It’s important to make decisions based on sound information rather that the emotion of the moment. Emotions play a role in investing, but you need to keep them under control if you want to be successful.
Don’t get caught up in all the hype. Turn on the TV and you may encounter talking heads who are overly optimistic (remember the term irrational exuberance?) or who are the bearers of gloom and doom. While you should pay attention to what’s going on with the market and your investments, you don’t want to get caught up in every twist and turn of the market’s soap-opera-like saga. You also shouldn’t assume that every single news event is somehow going to affect your investments. But if you are truly concerned about something that just happened or the way things seemed headed, talk with your advisor to determine whether a change in your investment mix is warranted.
Will we have another correction? When will it happen? How bad will it be? Those questions aren’t easy to answer, but one thing is certain: the future will come, regardless of whether we are financially ready or not.
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