Surviving the Financial Crisis, Reviewing Your Investments
No one knows just how deep, or long-lasting, recent share market losses will be. You can't control the markets, but you can take steps to protect yourself and even profit from a downturn.
?Avoid impulsive decisions. Government bailouts and free-falling markets make great news but not great indicators of the market fundamentals. Keep up with current events, but don't be tempted to make hasty decisions based on the latest news report.
You may wish to weed out weak performers. But rather than dwelling on the losses in your investments so far this year, keep a longer-term perspective. Historically, the stock markets have declined about one out of every five years, and stocks gained in each year from 2003 to 2007. Despite declines in 2008, if you've been investing in the share market over the past several years, you're still ahead.
Make adjustments to your portfolio, but make sure you have a solid, strategic reason for making changes, rather than selling and running away in fear.
?Seek expert advice and ignore media hype. Headlines sell newspapers, but if you're looking for guidance, turn to the experts. A financial adviser who knows your unique needs and financial goals can help you navigate choppy waters? and keep you from panicking.
?Protect and preserve. Keep in mind there's no way to protect all your share, bond, and index fund investments from losses short of selling everything and putting the money into interest bearing accounts. While this could seem like a smart move if the market keeps declining, the challenge will be deciding when to get back into the market. Many times in the past when the stock market rebounded it did so very quickly.
Instead, aim for the middle ground between staying put and heading for the savings accounts. Here are a couple of ways you can protect your money and reduce your losses while leaving yourself positioned to benefit from market upswings.
?Buy dividend-paying stocks. Stocks that pay dividends typically fare better in declining stock markets compared to stocks that don't; plus, they provide a small amount of income each time dividends are distributed.
?Rebalance your investments. While repositioning your investments to add to stocks may counter-intuitive, it's a strategy that proved to be wise in past bear markets. If you have a target percentage of stocks you want to maintain, chances are that your portfolio now has a lower percentage of stocks than your target, simply because of the drop in share price value. Rebalancing back to your target percentage will involve adding a bit more to your stock holdings. But, at least you'll buy low and will be poised to profit from a market rebound.
?Stick with liquid assets when possible. Shares and relatively liquid and cash is liquid; a second home is not. You may need cash in an emergency.
?Fearful times create opportunity. Buying while others sell is a time-tested way to accumulate long-term wealth; today's ugly ducklings may be tomorrow's swans. Accumulating wealth requires a broader perspective - for example, banking and resource stocks have taken major hits, but could make excellent long-term investments when the economy rebounds. An experienced financial adviser can help you cut through the fog of panic to determine an investment's future value.
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