On August 8, 2011, the S&P lost 6.7% of its value, and most investors are still suffering from whiplash caused by the market’s ups and downs last week. Whether you watched your portfolio plummet, saw the drop as a good time to buy, or sat on the sidelines stunned, I have some advice… take a deep breath and exhale slowly. This is going to be a marathon, not a sprint.
It seems like every time a piece of economic data shows positive signs of a recovery, there is updated “official” economic data saying that the previous quarter is revised downward. Just like the market, if you drop 600 points and go up 400 points the next day, you are still down! So what can you do to better handle this volatility and prepare yourself for a long road ahead? Here are some simple steps:
Know what your money is for. Every account or pot of money you have needs a purpose. If you need it within the next three years, make sure it is liquid. Liquid means that you can quickly and cheaply convert it to cash. While stocks are “liquid”, you run the risk of needing to sell when the market is down.
Once you know the purpose of all of your accounts, match your investment to the time horizon of that goal. Most of us have retirement accounts that have lost most, if not all, of the gains from over the past year. If retirement is decades away, breathe deeply and find some solace in that the market is expected to rebound and the S&P has grown an average of 7% annually over the past sixty years. However, take the recent market volatility as an opportunity to assess your own risk tolerance and adjust your portfolio accordingly.
If you have money that you don’t need today that is also not meant for college savings or retirement, you need to make sure your money is at least keeping pace with inflation.
For the best high yield savings accounts check out www.bankrate.com. Inflation-protected securities are another option; check out this helpful article for more information http://bit.ly/pPgRiA. You may also want to lock in some return through dividend paying stocks or ETFs while the experts try to figure out if we are growing or heading for another recession. The iShares Dow Jones Select Dividend Index Fund (Ticker: DVY) yields about 3.5% and tends to be less volatile than the overall market. It is also expected to keep pace as the market recovers.
Whatever you do, do not put your head in the sand and say you will deal with your money later. According to analysis from Blackrock, extreme down days (-6% or greater) have been historically closer to the end of a crisis. They are also followed by an average one-year return of +21.25%! So, if you are still sitting on cash and can handle the yo-yo market, put it to work.