If you’re brave enough to open your investment statements this month, do so calmly. Fight the urge to make short-term decisions that could be even more costly in the long-term.
It’s a fact: People are biologically programmed to make poor decisions while under stress. So take steps now to reduce stress and to position yourself for a softer landing when the market rebounds:
• Make friends with cash. A well-oiled portfolio–even in boom times–includes some cash for emergencies. Shore up your cash reserves now, if you haven’t already. The right amount for you depends on the security of your job, cost of living, and appetite for risk (Businessweek.com Feb. 19). Keep the money in a National Credit Union Administration (NCUA) or Federal Deposit Insurance Corporation (FDIC) insured savings or money market account at a credit union or bank, which is now insured up to $250,000.
• Don’t push the panic button. If shock over the decline in your investment balances causes you to go on a selling spree, remember this: Your paper losses likely will turn into real losses if you don’t have investments in place to recoup those losses when the market turns upward (Smartmoney.com Sept. 17).
• Make sure you’re diversified. Review your investment accounts. By spreading your portfolio among international and domestic stocks, bonds, commodities, cash, and other investments, you get more reward for less risk. Caution: Make sure you understand the investments you choose, and steer clear of complex investments you can’t explain.
• Don’t stop investing. Think of stock price declines as a bargain or sale on investments. By shying away from the market now, you may be making a mistake and missing out on low prices. Remember the dollar cost average principle: You buy more when the price is low and less when the price is high. If you have less than a five-year time horizon before you need to begin pulling your money out for retirement or other long-term goals, you need to reevaluate your investment strategy altogether, putting safety ahead of risk.
• Don’t eliminate all risk. If you do, you may hurt your investment return over the long term.
Article provided courtesy of Option 1 Credit Union. Copyright 2008 Credit Union National Association Inc. All rights reserved.
