Never have I spent more time on a blog, then I have this week. I generally start writing each week’s blog on Sunday. That way I can provide my readers with current information followed up by guidance on the latest financial news. This week has been somewhat bipolar. I intended on writing about the stock market lows that started a week ago. Until now.
Before Thanksgiving, I blogged about the stock market’s rise and some things that you should consider during a rising market. And, boy was it a rising market. I use the S&P 500 index as the benchmark for measuring stock market changes. Folks are indeed used to using the Dow, but it includes only 30 stocks, while the S&P 500 index includes 500 stocks and provides a broader measure of overall domestic stock market performance.
So where are we now? Last Friday’s (12/12/14) close was a smidge above 2000. Monday’s close was a smidge below 2000. Tuesday was another major crash and the rest of the week has been a major rebound. Will this volatility continue? Only time will tell.
We’re now back to stock market highs, rallying from 2000 to back up to 2070+ in one week’s topsy-turvy time. Just in case this irrational exuberance doesn’t continue, and the Federal Reserve doesn’t keep rescuing the market by keeping a lid on interest rates, then don’t panic and consider some of the following suggestions. Some of these might just help you be better positioned in the event that the market does reverse its position and head lower.
1) Avoid selling low and buying high. I know some very bright folks who exited the market in mid-2011 shortly before the U.S. government’s bond ratings were downgraded in anticipation of a market tumble. They guessed right in the short term. The markets did tumble. Unfortunately for them, the markets went on to set all-time highs ever since. Some are still sitting on the sidelines.
2) Continue to use Dollar Cost Averaging (DCA). DCA took a hit to its reputation during the financial crisis. Let’s face it. We lost hope in all investments. DCA means that you will invest steady regular amounts during both stock market highs and lows and the average over time will result in wealth accumulation. Got any better ideas?
3) Does rebalancing within an asset class also make more sense now? For example, suggested stock allocations include international stocks, emerging markets stocks, small-, mid- and large-cap stocks. You can further break down stocks between “value stocks” and “growth stocks”. Are you underinvested in one category while being overinvested in another? When I looked at my own investments recently, I decided to make some adjustments.
4) Don’t try and time the market. On any given day on CNBC, the money pros interviewed sit on each side of the market. That means that some believe the market is going down and some believe the market is going up. Stick with DCA over the long haul and get ready to deploy a portion of next year’s raise or cola into your savings and investing plan. And, finally,
5) Focus on the long term. This was easier said than done in 2008-2009. Panic set in and some of us headed for the sidelines. So if you had to do it all over, would you still head for the sidelines?
Behavioral finance has been dealing with the above behaviors for a long time. If we’ve learned anything from the financial crisis, it’s how to deal with the ups and downs of the market while pursuing wealth accumulation and financial freedom.
Stay the course, be diligent and stick with your plan. Keep your emotions on track. Seek guidance when necessary and avoid chasing performance.
Because as I’ve always said, it’s about life and how you live it!
In the spirit of financial well-being,