Market Volatility Underscores Importance of
Long-Term Investing
Do the rollercoaster ups and downs of the stock
market make you nervous? Well, you are not alone.
So, what can or should you do about this? Perhaps nothing. Many
financial advisors say you should think twice before making changes to
your investment strategy in response to the ups and downs in the
market. You need to be careful about making decisions that might hurt
your long-term goals.
When you think about investing in the stock market – and the ups and
downs that naturally come with it – consider the following:
- Have realistic expectations. While you
can’t count on the exceptionally high growth of the late 1990s, you
also don’t want to avoid stocks all together because of the
downturns of the market in 2000 or the 1970s. The historical average
return for stocks is 10.4% (S&P 500 average return from 1926-2007).
Stock values typically vary in response to investors assumptions
about the profit potential of the companies in which they are
investing. Because economic environments are somewhat cyclical – it
is only natural that stock prices vary accordingly.
- Ride the market cycle. Even professional
money managers can’t consistently pick the right time to get in and
out of the market. If you try to jump in and out of the market there
is a good chance you will be out of the market when prices rise.
Missing an upswing may mean missing out on a considerable return.
And those upswings typically happen very suddenly over short periods
of time.
- Lower stock prices can mean “bargains”.
When investing on a regular basis (such as through bi-weekly payroll
deductions) your account has the potential for greater earnings
because of an investment technique known as “dollar-cost-averaging”.
With dollar-cost-averaging, your regular contributions buy
investments at different points in time. When prices are high, your
contribution will purchase fewer shares; when prices are low, you’ll
automatically buy more shares. As a result, you typically end up
with a cost for the shares that is lower than the average price per
share over the same period of time
- Take the longer view. Investing for
retirement should be based on planning and goal setting, not what
you expect the market to do in the short term. Once you have a plan
and have established your asset allocation, don’t surf the web daily
to see how your investments are doing. For long-term investing, less
frequent updates may be best at keeping your mind- and nerves-at
ease.
Don’t let the rollercoaster ups and downs of the
stock market make your stomach churn. It is important to remember that
the stock market is cyclical, and when stock share prices fall they
are likely to rise again. Stay realistic and calm and you’ll enjoy the
benefits of the ride when you reach retirement!
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