It seems that investors get just as nervous about market highs as they do market corrections. As of this article, the market has now corrected about 5%. It’s also been almost 2 years since a 10% correction.
Lots of investors moved their money to cash and cash equivalents during the financial crisis in 2008. A lot of that money has not made it back into the market. The problem with fear is that they missed a huge stock market rally since then.
Now you have some difficult decisions to make.
Do you use this correction as an opportunity to invest low?
Is there too much risk in markets?
How do I avoid a mistake?
Getting better returns than cash is essential long-term. Telling investors to get back into this market is difficult at best. Everyone has an opinion. Here are some ideas for getting back into this market, and helping minimize the risk.
Dollar-cost averaging. If you are participating in a 401k at your employer, you already use this technique. Dollar-cost averaging allows you to purchase systematically over a stated period of time. It works well in a rising market or declining market. You don’t put all your money in at once.
By putting smaller amounts into the market over time, it keeps the investor from plopping too much money in at precisely the wrong time. Bottom line, it helps people get over their psychological block of investing.
Asset allocation and diversification. There are dozens of investments out their that use a total portfolio approach. By using an investment that performs asset allocation decisions on your behalf, you leave the investment decisions up to the professionals. In fact, you could combine the asset allocation investment choice with dollar-cost averaging for a solid approach.
Dividends. Dividend paying and preferred stocks are great option for investors that are spooked. Not only do the stocks they own provide some growth, but generally they offer pretty good dividends too. Those same dividends offer some downside protection if the market starts to fall.
Review your risk tolerance. Too many times I hear investors say that they are middle of the road when it comes to risk. If you haven’t reviewed your risk tolerance in the last few years, this may be a great time to do it. Define exactly how conservative you really are. Use a good risk tolerance questionnaire for guidance.
Investing is both an art and science. Anyone telling you that they know exactly when to get in and out is not telling you the truth. No one knows that timing for sure. Like this article? Click here for a free subscription. Questions about your investment approach, write me at firstname.lastname@example.org, or give me a call at 859-225-2596.
Diversification and asset allocation strategies do not assure profit or protect against loss. Investing regular amounts steadily over time (dollar-cost averaging) may lower your average per-share cost. Periodic investment programs cannot guarantee profit or protect against loss in a declining market. Dollar-cost averaging is a long-term strategy involving continuous investing, regardless of fluctuating price levels, and, as a result, you should consider your financial ability to continue to invest during periods of fluctuating price levels.