After the worst rout in stocks in more than two years on Monday and a steady market decline since mid-July, it's hard not to feel edgy. But the best investment strategy is to sit tight, financial experts say.
"It's important to not push the panic button," says Greg McBride, CFA, senior financial analyst at Bankrate.com. "To panic and sell guarantees nothing more than locking in those declines."
Here's some grounding. Traditionally, a bear market occurs when several broad market indexes are down by at least 20% over a two-month period. So far, the Dow Jones Industrial Average has fallen 7.3% since June 9 and the S&P 500 is off by 9%.
McBride also says stock markets experienced a 17% drop the same time last year and then quickly recovered. So just because the stock market looks like it's in a nosedive doesn't mean it can't pull out of it.
Invest For the Long Term
There's something to be said for thinking and investing for the long haul. In the 15 years prior to 2011, the average annual return from the S&P 500 index was 7%, says Stuart Ritter, vice president and Certified Financial Planner with T. Rowe Price. To book that average, true buy-and-hold investors had to resist the temptation to sell during the dot-com bust in 2000 and stomach-churning recession in 2008.
"Guessing what the market is going to do or not going to do tomorrow means there's only one way to be right and a whole lot of ways to be wrong," Ritter says. "That's no way to set a strategy."
7 Investment Strategies
Go to Las Vegas to gamble. Otherwise, stick to these seven money strategies during a market retreat or rally:
- Don't treat your money as a lump sum. Divide and earmark it for certain goals.
- Figure out those goals, which can be retirement, paying for your kids' college tuition, buying a car or financing a house.
- Identify the time horizon for each financial goal. Do you want to buy a house in the next six months or five years? Do you want to retire next year or in 30 years?
- Invest the money for your short-term targets. For goals like buying a car or a house in the next few months to two years, put the cash in less risky investments like a savings account, certificates of deposit or money market account. That money will grow marginally, but won't be subject to huge losses. The Federal Deposit Insurance Corp. insures deposits up to $250,000 until the end of 2013.
- Invest your long-term money. For far-off goals like retirement or paying for college tuition, think stock market. The key is to keep up with the rate of inflation, and that's the best way to do it, Ritter says.
- "Draw a line in the sand for when to get in and get out," says Phil Cook, a Certified Financial Planner and president of Mogul Wealth Management Inc. in Manhattan Beach, Calif. "That way, you don't have to sweat it out." Cook recommends making these decisions as soon as you invest the money, not as you ride the roller coaster of volatility.
- Set triggers for buying. Market downturns present opportunities to buy investments that may have been too expensive before. Establish those limits in advance and follow through.
For example, during the dizzying market swoon Monday, Cook bought preferred shares in a financially sound (read: conservatively leveraged with predictable cash flows) company with yields higher than it had registered in a while.
"Seven percent yields in today's interest rate environment. That's fabulous," Cook says.