Five Things to Do In Light of The Market Volatility
When my daughters were younger, we taught them to STOP, LOOK, and LISTEN before they would cross a street. The same advice can apply to today's Wall Street.
Stop – Step back from the curb, i.e., the edge, and take a deep breath and exhale. Repeat three times. Relax.
Look – What has fundamentally changed? So far, the changes affecting our daily routines are short-term in nature. While recent market volatility may have an unsettling impact on our investments, we need to look at the above advice. If the underlying fundamentals for why you made a particular investment decision remain the same, then stay the course.
Listen – Try to filter out the noise and emotion and evaluate the information on the markets, economy, and your situation, and compare your insight with your previously well-thought-out financial plan. Chances are you'll discover that it isn't a good idea to throw the baby out with the bathwater.
Here are five things you can now to add some order to your financial well-being:
Cash Reserves – review your current cash reserves, I.e., Money in the bank, investment accounts, and under the mattress, to see whether you have enough cash to cover 3 to 6 months of living expenses. If not, begin to put together a plan to get there.
Evaluate your Risk Tolerance – I call this your "sleep at night factor." Talk with your advisor or use one of the tools available online to check your ability to tolerate market risk (volatility). When accessing these tools, try to approach the questionnaire from a long-term perspective.
Review you Asset Allocation – Once you evaluate your ability to tolerate market risk, you'll get a recommended asset allocation, which you can use to compare against your current investment accounts and 401(k). If you have a noticeable disparity between your recommended allocation and actual allocation, devise a plan to reallocate your existing investments. Keep in mind that asset allocation diversification means different asset classes (stocks, bonds, cash, etc.), not just different investment vehicles.
Continue to Invest - "Dollar Cost Averaging"; "Buy Low – Sell High"; "It's not a loss until you sell." All these still apply. Keep investing in your future and follow your financial plan.
Re-evaluate your Goals – Sometimes, when life events happen, we need to look at what motivates and drives us to save and invest and evaluate whether a change or adjustment is warranted. Reviewing our goals may help us focus on our overall financial plan and long-term outlook.