In the last week or so, I have gotten many frantic calls and e-mails from clients. The market has gone down and chances are will continue to do so. If you are feeling nervous about this market, read on. Two important things to consider right now and an EXCELLENT question from a client!
1) What do you want to do with your money? If you want it in less than 5-7 years, most of it should not be in the stock market. Consider bonds, CD or even a money market fund. As you can see below, the bond fund has actually MADE money.
2) If you are investing for the long run (more than 10 years), make sure you are properly diversified and you will be able to buffer the losses. Check out these mutual funds YTD returns as of (as of January 18, 2008):
S&P 500 -9.68%
Balanced (combination of stocks and bonds) -7.75
Retirement fund 2010 -4.77%
As you can see diversification really works!
Excellent question from a client:
“Could you remind me (again) why we need to “dollar cost average” into our IRAs and 401ks when the going gets tough? I’m only partly kidding. I’m lacking the stomach!” Liz
When you are investing into your IRA or 401k every month, besides the fact that you are building up your balance without even thinking about it, you are also taking advantage of dollar cost averaging. This current stock market is ideal for dollar cost average because you are buying a fixed dollar amount of the mutual funds in your retirement plans, regardless of their share price. Since the markets are lower, you are actually getting more shares for the same fixed dollar amount! Down the line (a few years from now) when the market has bounced back, the shares you bought today will actually be worth much more! It also lessens the risk of investing all your money at the same time. What if you had invested all your money right before the market dropped? Dollar cost averaging takes the guess out of this equation.
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