By FPA member Jason Laccone, CFP®, EA, CRPC®
Last Updated: August 22, 2011
Down, up, down, up, up. In early August, the market took us on a wild summer ride resulting in one of the most volatile weeks in Wall Street history. This left investors scrambling for answers.
Believe it or not, these unorthodox swings are beneficial to your investment approach. As humans, we tend to forget easily, focus in the now and forget the past. You know, don’t learn from the past because that would be admitting that we make mistakes.
What is the answer investors are scrambling for?
Think of it like a golf swing. When you are struggling on the course you need to remember to go back to the basic mechanics. Everything else will work itself out as long as you remain realistic in your approach.
There are 31 flavors
When the market went down four percent, did your investments go down four percent? You may need to review your asset allocation and diversify depending on your goals and objectives. You probably have the staples: stocks, bonds, cash alternatives. Have you considered real estate investment trusts (REITs), mutual funds with hedging strategies, metals or collectibles? It might be as simple as changing the percentage of stock versus bond holdings.
Evaluate your roller coaster experience
Did you lose sleep last week? You just experienced the ultimate risk tolerance test. Did you pass? Perhaps you need to adjust your investments to match your true risk tolerance.
You are running a marathon, not a 100-yard dash
It is easy to get caught up in the day-to-day returns, but you must remain focused on the long-term goals you set out to achieve. You have not lost a dime until you sell.
Check the parachute before you jump
One day an investment may look more attractive than another, but by the time you make a switch it could change. Diversification allows you to always be invested in the top sector of the market.
Darts can be dangerous
Are you caught up in trying to time the market for a quick gain to get even for past mishaps? Try an approach that will make sure you are buying low. Use dollar cost averaging. Figure out a constant dollar figure to invest monthly and stick to it. When the market is down, you will buy low. Yes, you will purchase fewer shares when the market is high, but in the end you should fair better than trying to figure out that crystal ball.
Don’t duck and run for cover
Focusing too much on the short-term fluctuation can be detrimental to your portfolio but so can ignoring it. Some people refuse to look at their statements in an attempt to take emotions out of the ultimate goal. I applaud the effort to remain long term, but you need to periodically check your portfolio at least every six months. Rebalancing your portfolio periodically is a must in order to remain in line with your risk tolerance and objectives.
If you use these factors and be honest with yourself in setting up an investment approach you will be able to cope with any and all markets.
FPA member Jason Laccone, CFP®, EA, CRPC®, is a principal at Scripps Tax & Financial Group in San Diego, Calif.