Don't Panic! Some Simple Investing Tips for the Nervous Investor
After one of the worst days on Wall Street in recent memory, there is a great deal of talk about international credit, bond yields and defaults and ratings. The burning questions on many people's minds seem to be: what does that mean for your investments?
Financial planners say not to panic, but now is the time to take a hard look at your portfolio.
Should I sell? No -- but maybe you should buy.
Ted Schwartz, the president of Capstone Investment and an investment adviser in Colorado Springs, Colo., cautions investors not to sell "partly because of the lack of liquidity right now."
"Anything you are going to sell you are putting on a fire sale right now. Even if you decide you want to become more conservative in your investments, you might need to have a gradual approach to that, rather than dumping everything that has risk on it right away," Schwartz said.
David McPherson, a financial planner with Four Ponds Financial in Falmouth, Mass., cautioned investors to stay calm and emphasized that everyone should have a balanced portfolio that already compensates for tumultuous times with a healthy mix of bonds and stocks.
"We don't know when they are going to happen, but if you are investing over the long term there will be times the market is falling apart. So we construct the portfolio with that expectation," McPherson said. "We include a healthy portion of bonds and cash to act as a buffer during the difficult times. If we didn't have to worry about times like these, investing would be easy and we would put 100 percent into stocks and not worry ... You want to decide ahead of time to target what percentage of your account is in stocks, bonds and cash."
"What is considered to be a moderate portfolio is 60 percent stocks and 40 percent bonds. Use that as a starting point. If you lower the percentage of stocks, it's more conservative, increase the number, it's more aggressive," McPherson added.
McPherson tells investors that if they have a cushion of three to five years to fall back on their bonds and cash, they really "don't have to worry about short-term problems in the market."
But, it's important to make sure your investments are conservative enough to have that cushion. Schwartz stresses that despite investor anxiety it's actually a good time to buy and hold on to stock.
"I think if you are an optimist here there will be some great buying opportunities in quality stocks. And that's what I would emphasize to buy the highest quality as you go forward," he said.
Experts also say it is exactly the wrong time to shift to cash.
"So many people moved all the way into cash during the depths of the financial crisis and they missed out on a tremendous bold run after that. Stay patient, think about the long term," Joe Magyer, senior analyst with The Motley Fool said.
So not gold, not cash... Is there any safe place for my money at all? The answer: always a balanced portfolio. And most importantly -- be patient.
What about those college savings accounts? Should I worry about how much is left?
Analysts say that if your kids are still young, you should stay the course with your investment plans. But if they are close to college, stocks don't make sense.
"I'd definitely be all the way in fixed income right now. You definitely don't want to put your kids college path at risk by being in stocks, especially if you're taking that money out in the next couple of years," Magyer said.
Should I refinance my mortgage?
Yes, but it may not be as easy as it sounds. McPherson said it is a "very good time" to refinance, but that's only "if you have enough equity in your house."
"The problem I've seen the last few years is that banks are a lot stricter about who they give mortgages to. It used to be you could get a mortgage with 5 percent equity. Now banks are a lot tighter and they want more," McPherson said. "If you qualify for a new mortgage, it's a great time to refinance."
Schwartz agreed, saying that if you can lock in a low rate now it would be a good move, because we are at the "lower end of where interest rates are on the spectrum of interest rates."
What should I do about my 401(k)?
Financial planners caution that this depends on how close you are to retirement, but generally speaking it's better to be cautious than rash. And even if you are close to retirement age you won't be depending on every cent the day you retire or at least you shouldn't be.
Schwartz said if you are still contributing to your 401(k), then don't change your plan.
"What determines how well you do on your 401(k) is where you finish as opposed to the journey," Schwartz said. "If you are still planning on contributing for years, this time may help rather than hurt you because you are literally buying stocks when they are cheaper and your question is where they end up when you retire."
Scott Cole, a financial planner in Birmingham, Ala., said it's important to remember that even if you are ready to retire, you will need that money to last for perhaps decades.
"If you are retiring, even then I try to tell investors you don't need all your retirement assets right away. You need them to last you 25 or 30 years. If you reach retirement age and you take everything out of the market, that's not wise." Cole said to look at your family history and your life expectancy, and assess how long you will need your assets to last. "If you have three to five years of living expenses, and you fund that every year ... you will have time to recuperate any losses."
Still nervous? That's normal, but it may be time to gain some perspective.
"As bad as this is, this is nothing like what we faced in 2008 and the beginning of 2009. This has more to do with the fact that the economy might slip back into a recession. It's not anything like we faced just a couple of years ago," Cole said. "Uncertainty seems to run the day right now, and one thing we know, markets don't like uncertainty."
He said that "emotional based investing" is a "good way to lose your shirt," and it's important not to take losses personally or have an emotional attachment to losses or gains.
If the market is down, it's not "because the market is picking on you." Instead, it's because "you are buying into rallies."
"The reason you make money is because you are acquiring risk and there is a premium for the risk you are taking," Cole said. "You expect to be compensated for volatility. Now that compensation doesn't happen right away. The longer you hold on to an investment the more you should expect to be compensated for holding that risk. Things have to come down at times. It allows you to buy in and hold on to it."
Cole added: "I don't know when the bottom will be, but I do know it's a better time to buy than two weeks ago."