Just after our previous column on investment risk and reward was published, stock markets worldwide generally experienced one of their worst weeks in a while.
Who knew so many global money managers read the Sunday Leader Telegram?
In light of the recent stock market volatility, it seems like a good idea to spend this week on how to decide if it’s time to buy, sell, hold, or panic.
It’s not about “the market”
It’s about you, and what you want/need from your money.
If you have enough money to retire comfortably, or are well on your way to doing so, it may still be a good time to reduce the potential risk and reward you may experience in the near or distant future.
The same holds true if you’ve been saving for some other goal (for example, buying a house or paying college expenses) that is likely to come to fruition in the next few months or
Last but certainly not least, you may be unable to emotionally or psychologically withstand the sudden and sharp declines that have occurred and will continue to occur in the future.
For everybody else . . .
If you don’t fit into any of the above categories, the good news is that going forward, the money you invest or maintain at today’s lower prices is likely to earn you a higher rate of return over the very long term than if you had invested it a few months ago, or if you decide to pursue a lower-risk strategy going forward.
The bad news is the trade-off of getting that higher return is that you will have to accept periodic declines in the asset and investment values.
These types of declines should be welcome if you are regularly saving money for a goal in the distant future (such as contributing your at-work retirement plan or making contributions to an IRA or Roth IRA).
In fact, if you’re in a position to do so, you may want to increase the amount of money you’re saving to your long-term retirement accounts, especially if those contributions are in to pre-tax plans like 401ks and 403bs.
If you are already retired and spending your savings, you may want to pare back your withdrawal amount until your investment account value can support a higher distribution
Maintain a rainy day account
One way you can mitigate the financial and emotional damage of these kinds of downturns is to keep a portion of your investments in a spot that’s safer, more predictable, and more liquid than something tied to the stock market.
True, when you start considering places to park your money that fit into this category, you will be disappointed in the current rates offered (which is part of the reason so many other more-aggressive investments have done so well over the past few years).
But in return for accepting a little-or-nothing rate of return on your safe money, you get several benefits over the short- and long-term.
First, you will have a pool of funds that won’t be falling when your more-aggressive investments are declining, thereby making the drop in your “big picture” less dramatic.
Second, when prices do decline, a portion of your secured savings can be tapped to reinvest at theoretically more-attractive valuations.
Finally, the savings can be used to pay for planned purchases, living expenses, and other larger expenditures, without having to liquidate the part of your portfolio that has been reduced to fire-sale prices.
This last feature is especially important if an economic decline causes you to lose your employment, income, and benefits.
Whether it’s panic or prudence that motivates you to move some or all of your money to more conservative options, it’s important to know how to make the most on your savings.
So we’ll tell you how to get a greater return on your principal, while ensuring that you still get the return of your principal.
(Hopefully you’ll be able to move your money to best places before the other trillions of dollars apparently controlled by our readers get there first).