If you follow the stock market, the recent downturn may have you feeling a little nervous. Stephanie AuWerter, Editor of SmartMoney.com has some tips for staying afloat.
First, keep all stock highs and lows in perspective. It wasn't too long ago that the Dow reached a record high of 14,000. Now it's off about 500 points from that - or about 3.5%. The explanation? Investors are worried about the mortgage market, rising oil prices and a tightening in credit which could slow down the healthy pace of the big corporate deals that we've been seeing lately. It's bringing some uncertainty - and some volatility -- into the market. "Be prepared for a bumpy ride," says AuWerter.
It's important to keep in mind that when the market is falling, resist the urge to sell. That's often the worst thing you can do - you're locking in your losses. If anything, for long-term investors, it can be a good time to buy. "Try not to time the market," says AuWerter.
The easiest way to not let your emotions run your investment portfolio is to use dollar cost averaging, where you make regular, set investments over time. It forces you to buy more when prices are down - and buy less when prices are high. The most common way to dollar cost average is to participate in your 401(k), so be sure to participate.
Also, be sure to keep a cash cushion handy. You don't want to be forced to sell when the market is down to raise cash for some expense. "We should all have an emergency fund that's worth three to six months of living expenses," says AuWerter. The emergency fund should be held in a cash account, like a high yield savings account. The good news is, cash is earning about 5% these days.
A balanced portfolio is going to hold up a lot better when the markets turn than one that favors high risk or low risk stocks. Being too aggressive - or too conservative - is a sure way jeopardize your financial goals. You want to be diversified between stocks, bonds and cash. With equities, spread out your risk between companies of different sizes and locations throughout the world. Right now, we're seeing a shift away from value in favor of growth. There is also a shift away from small caps to large caps. To avoid major losses, it's best to be balanced.
Finally, don't forget the big picture. If you've done all of these things and you're investing for the long haul, don't get worked up over short term situations. "You can watch these financial shows and get a little crazy, but over the long haul, things tend to go up and not down," says AuWerter.
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By Stephanie AuWerter