CWR Building Wealth – What Should I Do Now?
By Dwight Harshaw, BBA, Personal Finance Counselor
The stock market is like a roller coaster ride at an amusement park. You get in and secure yourself to avoid a disaster. You enjoy the view during the slow ride up to the apex. And then, suddenly, you’re in freefall, speeding to the bottom with the crushing force of the wind in your face, your stomach turns and your body shakes with excitement and fear, as the car turns and jerks on the tracks. When you think you’ve had enough, it slows down and stops to allow you to get off, or to get back on to be thrilled again. The stock market(s) takes investors on a similar ride; rising and falling on the collective exuberance, fears, expectations, and disappointments of those who invest money into stocks. As I am writing this-August 2011-the market(s) are down significantly and this is one of those volatile periods when some people ask, what should I do?
Should I sell now?
Yes, if you need the money immediately to live on or you can’t sleep at night. No, if you have time and you don’t need the money now. The compound annual growth rate of the S&P 500 from 1910 through 2010 is 11.43%. If you are invested in good companies or indexed mutual funds your money should grow over time, based on the historical returns. Don’t allow a moment in time to overshadow a century of evidence.
Should I wait for the market(s) to hit bottom to get in?
No one knows with absolute certainty, when that time is, not until after it has occurred. Timing the market’s ups and downs is a matter of chance, even for professionals. Stocks are significantly lower than they were a short time ago. If you want to invest in the stock market, and you have years for your investment to grow, do so by making periodic investments, not lump sums, into good quality mutual funds. It is a safer investing technique and a good way to smooth out risk.
Should I switch to safer low return investments?
You should switch from growth investments only if you need your money soon or you can’t endure the volatility of the market. Lower risk usually means lower returns. Lower returns on your money can cost you dearly in the future with lost purchasing power, due to your money not keeping pace with inflation.
What should I do now?
If you’re in, stay put. If you’re a new investor you should take some risk for higher returns, if you have the tolerance. Assuming that you are in the accumulation or consolidation phases of life (25 – retirement), investing the same amount, at the same time each month, no matter what the market is doing, is the best strategy. Dollar cost averaging is an ideal way for small investors to purchase stocks for long term gains. This strategy also helps mitigate short term downward risk. When the markets are down, you’re getting more for your money and that’s how you build wealth. You buy low and sell high.
This information is for general use, not specific advice. You should consult with a financial professional that you trust, for matters regarding your particular situation.
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About Dwight Harshaw: Dwight Harshaw is a personal finance counselor and writer. He is also a Realtor with Access Realty, Inc. in Little Rock, Arkansas. He has a BBA from the University of Arkansas at Little Rock in Finance with emphasis on financial planning.