Q: Help! I just looked at my brokerage account. Instead
of retiring early, I may have to work until I'm 100! What can I
do to get my financial goals back on track?
A: While the stock market has corrected recently, that
doesn't mean the end of life as we know it. On the
contrary-this is how markets are supposed to act. Isaac Newton
probably said it best: "What goes up must come down." The
market's recent fluctuations may seem a bit extreme, but this
volatility may be here to stay. Fortunately, there are a lot of
things you can do to ensure that you'll be spending your golden
years in some place other than working at the Golden Arches. Here
are five steps you can take now:
1. Don't just do something-sit there. Selling out as
your stocks hit bottom may not be the smartest action to take.
Instead, compare your portfolio with other similar funds and
benchmarks in appropriate market sectors. For example, if your
large company growth-stock mutual fund is off by 3 percent,
compared to the S&P 500's more than 8 percent fall from
grace, your fund is actually doing well. The secret here is to have
a little patience: Mutual funds are long term investments, not a
spot for fair-weather friends.
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2. Assess your risk tolerance. Investments keeping you up
at night? Now could be the time to have a heart-to-portfolio talk
with yourself. Anyone can take a big risk-and feel proud of
themselves when they make a killing. The secret to investing
success, however, lies not in the return on your money but the
return of your money. If you find yourself worrying about
your investments, the risk level may be too high. Consider
repositioning assets to investments that have less volatility. This
may mean lower returns, but isn't a good night's sleep
worth it?
3. Dollar Cost Averaging (DCA) is your friend. Volatile
or down markets provide the perfect platform for adding to an
investment on a periodic basis. In down markets, your periodic
purchase may be buying shares at lower and lower prices. While you
need to have the money to keep this up, it's often better than
trying to pick the best day to invest-whenever that is! If the
market suddenly starts going up, you'll be paying more for
shares than you would have on a down day. So while DCA won't
make you rich tomorrow, it makes you a regular investor-and
that's a sure way to wealth.
4. Neither a borrower nor a lender be. Buying stocks on
margin? Make sure you understand how these accounts work. Margin
accounts allow stockholders to buy additional shares of stocks
using their shares as collateral. A fall in the price of shares
held in the account may necessitate immediate action on your
part-if you can't send in money to meet a margin call, the
brokerage firm has the right to sell your stocks. Period. You could
lose everything, and then some.
5. Assets, assets, where are your assets? With recent
market run-ups, you may find your portfolio woefully overweighted
in certain sectors. The past few years have been great for tech
stocks and large-cap growth funds, and many investors'
portfolios are underweighted in small company stocks, fixed-income
investments, foreign investments and value-oriented stocks or
funds. Consider your risk tolerance and then rebalance your
portfolio. When the markets turn and go another way, you won't
have most of your eggs in one basket.
Whatever the ups and downs of the financial markets, remember
the adage that's attributed to portfolio manager Peter Lynch:
When it comes to investing, the most important organ isn't your
head-it's your stomach!
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| To err is
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"Follow
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Lorayne Fiorillo is a financial advisor and senior vice
president at a major brokerage firm. She spent six years as the
on-air financial commentator for EyeWitness News and 11
years as a market commentator for National Public Radio. She is the
author of the new book, Financial Fitness in 45 Days: The
Complete Guide to Shaping Up Your Personal Finances
(Entrepreneur). She specializes in retirement and business
planning for small businesses.
The opinions expressed in this column are those
of the author, not of Entrepreneur.com. All answers are intended to
be general in nature, without regard to specific geographical areas
or circumstances, and should only be relied upon after consulting
an appropriate expert, such as an attorney or
accountant.