Over the past couple weeks, the stock market has had more ups and downs than our love life.
So, yeah, it’s volatile.
That said, do not rush to buy or sell your investments. We hope that the markets will stabilize soon, but the important thing is not to panic in the meantime (we’ve said the same of our love life, too).
Before you get depressed, freak out, or do anything drastic, here’s what you need to know to stay calm and ride the storm:
The Past Can’t Predict The Future, So Hang Tight.
We suggest that you only invest in the stock market for the long-term (five or more years). Ups and downs are nerve-wracking, but over a long period of time, the stock market has always come out ahead. So, unless you have a serious reason to buy or sell, don’t let the day-to-day fluctuations of the market inspire you to buy or sell. Studies have found that people who trade frequently actually come out worse for the wear—even if you think that you’re making smart decisions, it’s a basic human tendency to buy when the price is high and sell when it’s low. Damn our psyches.
This Isn’t Poker, So Don’t Go All In.
The best way to weather the market is to be smart about your investments. Think of your portfolio as all of the money you have stored up: Are you keeping enough money at the bank in high-yield savings accounts and CDs? Don’t invest money that’s in your emergency fund, and never rely on your investments to pay for daily expenses like bills. If you’re concerned about losing too much money, manage your asset allocation to include “safer” investments like bonds.
Don’t Let Jim Cramer Or The E*Trade Baby Fool You.
Really excellent investors are successful because they work off of leads or hunches that aren’t publicly available. The mere fact that the info on channels like CNN or CNBC is public will make it less valuable to you. Plus, serious investors spend long hours poring over (pretty boring) government filings and company documents. Most of the commentators on TV are sensationalists rather than researchers or scholars. Investing will be a win in the long-term. Just keep your cool.
Avoid Extra Taxes By Holding On To Your Investments For At Least A Year.
You’ll pay taxes on your earnings either way, but you’ll pay heftier taxes if you held your investments for only a short time. If you hold your positions for over a year, you’ll save at least 10% and up to 20% on your 2010 taxes, depending on your income. But, if you hold your positions for less than a year, you’ll be facing taxes at the same rate as your normal income tax (which will almost certainly be much higher). If in doubt, check out the IRS info on the topic.
If You Are Concerned, Here’s One Thing To Do: Dollar Cost Averaging.
Dollar cost averaging is the process of buying into the market in small steps in order to minimize risk. For example, you could contribute an equal amount to your retirement fund every month. Here’s why it might make sense in a volatile market: Say that you put a huge chunk of money into the stock market in September 2008. Shortly thereafter, you would have lost a huge amount of your investment. If, instead, you’d invested a little bit every month starting that January, your investments would have earned more interest in the meantime, and your portfolio would have had time to average out.
Most important thing: Take a deep breath and chill out. Now, if only we could do the same when it comes to our love life…