The wild swings in the financial markets are enough to scare any investor. With huge drops followed by big gains and then further drops… what is an investor to do?
First let’s review what’s happening. It is NOT individual investors making buy/sell decisions that drive financial markets. It’s the computerized models of the major investment houses that are driving the crazy swings in prices. It is not an individual fund manager making buy/sell decisions. The computer models make trades automatically without human intervention. So even though commentators and media reports refer to what “investors” are doing, it’s really the computers.
So, knowing that’s what’s driving volatility, it’s time to review your financial goals, time lines and consider your risk tolerance. As I’ve tried to emphasize, no money that you expect to need in the next 5 years should be in the stock market! Shorter term goals should be accomplished with less volatile investments and savings products. Online savings accounts are a good home for your short term goals.
Even if you are on the verge of retirement, DON’T FREAK OUT! While you may plan to retire shortly, your investment horizon for retirement is about 30 years. Yes, you need some money in secure savings/conservative investments, but not all of it… even if you hope to retire shortly. You need to be invested in stocks for the long run to keep ahead of inflation.
Think about target date retirement funds (learn about them by searching this blog). They start out for young investors with most of the investments in stocks. Target date funds gradually and automatically get more conservative as the proposed retirement year approaches. Same concept applies to 529 Education Savings Plans like Utah’s 529: https://my529.org/. The 529 age-based savings plans start with high percentages in stock and move to almost all fixed income savings options as college age nears.
If you cash out your stock investments now during the wild market swings you will only lose money by locking in losses that were only numbers on paper.
DON’T focus on year to date (YTD) returns. It’s early in the year and we started the year hear the end of an 11 year long bull market in stocks. Think about where you started.
Source: Financial Planning for Women