Staying Sane in a Volatile Stock Market
68The title of this article is clearly easier said than done. Being largely invested in the stock market, whether it is through 401k’s employee stock options or purchase plans, Roth IRAs, education plans, or a myriad of other options, the fluctuations in the current stock market can make even the most seasoned investor a tad queasy. There is no doubt that over the long term, if you have a well diversified portfolio, chances are your investments will do well if you have a steady hand. But How do we keep from pulling our hair triggers when we see our life’s savings fluctuating by 50% or more in a matter of months or just a couple of years?
I guess the first answer to this question would be consider how long you have until you would like to retire and what your goals are. If you are freshly out of school and have decades in the labor force ahead of you, you can stand to take a few more risk than someone that may be winding down their time and are planning retirement in the next 5 to 10 years. So what does this mean exactly? Risk is a relative thing. There is a higher risk factor involved if you invested in a stock that tracked the NASDAQ exchange that is highly technology based as opposed to the Down Jones Industrials which is heavily weighted with big, blue chip, cash cow stocks that have been around since the beginning of time and are likely not doing to disappear anytime soon. Of course, with more risk comes the potential of more reward.
Some who are just starting out in the stock market gain with many years until retirement can afford to risk some investment funds on pink sheet stocks, or those not officially associated with any major exchange. These stocks are often low priced, even penny stocks, whereby high multiples of shares can be purchased with not a lot of money to risk. Many who invest a small percentage of their portfolio in this type of equity consider it money they can “afford” to lose. This is because a pink sheet stock can disappear without a trace without any way for an investor to recoup their investment. They can also move a penny or two in the positive direction and make a nice little profit in a short period of time. An investor must not be risk averse to invest in “pinks” and should only allocate a tiny fraction of their portfolio no matter how long they have until retirement.
A larger, if not remaining portion of a young investors investments can be allocated to growth equities. These are stocks that are usually beyond the start up phase but are not yet cash cows. These companies are actively investing in growth and what ever earnings they have are generally reinvested into their growth plan as opposed to being paid out to stockholders in the form of dividends. When considering this kind of stock, the NASDAQ exchange is a good place to start. Take a look at their financials of the past few quarters and years and see if they are actually achieving growth, what the setbacks are, and if they are still anticipating growth in the future. These as well as comparing their performance to that of their competitors and their overall market sector can help you make a good choice for profits over the long term. Growth stocks are not for the timid though. They often fluctuate at a higher degree than the overall market which is why a young investor should choose wisely and stick with that choice over a longer period of time. Don’t be tempted to sell on what could likely be a temporary downward blip in a long growth trajectory.
Investors that are closer to retirement should be a lot more risk averse than a long term, younger investor. An older investor should consider re-allocating from their more risky and volatile equities into a mix of income/dividend stocks, bonds, certificates of deposit, and other stable, lower downside risk investments. Getting a good retirement planner might be a good idea to help this type of investor plan an investment strategy that will get them through to retirement in one piece and with money to live without angst. The problem in today’s market is that many investors who are approaching retirement have lost a lot of what they have saved over their lifetime in the recent extended recession we are experiencing worldwide. What do people in this circumstance do? They are seeing their retirement hang in the balance and their funds fluctuating at a heart palpitating pace.
Investors who are near retirement and have seen significant losses followed by gains that get them caught nearly back up followed by losses again can find it difficult to not just pull all of their money out and hope it is enough to live on once they retire. Depending on how much you put away, maybe this is a way to go if you are willing to sacrifice a little quality of life in retirement. Others may decide to stick almost exclusively to savings accounts, bonds, or certificates of deposits to at least show some upward movement in their money until retirement. Still others may want to consider re-examining when they would like to retire and invest in some income producing equities that also have potential for growth over the medium to long term. Stocks like Johnson and Johnson, Eli Lilly, and Disney are good examples of stable stocks that have good upward potential and pay a decent dividend. Eli Lilly currently pays out nearly 6%. That is better than almost any savings account these days. Disney pays a smaller dividend but has upward potential because of the everlasting need for entertainment for all age groups. Johnson and Johnson has such worldwide name recognition and large portfolio of heavily demanded health products that it has great potential for growth and pay a nice dividend.
It is definitely a scary time for investors of all ages, especially since even the most seemingly benign world and economic news can shake the stock market to its core. They key is to leave fear at the door and not to fret about the past. Look at the future and decide what next steps need to be taken. Good research can help you make wise investment choices and finding a good financial planner can take a lot of stress out of this process as well. Good luck!
Full disclosure: I hold positions in Eli Lilly, Disney, and Johnson and Johnson. Nor am I a financial planner by trade. This article is intended as my personal opinion about investment ideas and strategy.
