The stock market volatility this week might freak some people out. I understand completely.
It’s not easy to watch portfolio values go down.
But I am writing today to remind you of a few important things.
Investing
- The stock market will always and forever go UP AND DOWN.
- Historically, the market has been more UP than down—last 10 years the market has gone up so much it’s easy to forget that it goes down too.
- There are many markets to invest in. Large caps, mid caps, small caps, bonds, international, real estate, commodities. They do not all move together so you can build a portfolio that looks very different than the “market” if you want too.
- Bond values are inversely rated to interest rates. (interest rates go up, values go down)
Life
- 3-6 months of emergency reserves.
3-6 months of EXPENSES in a cash position.
3-6 months.
The simplest form of financial protection is having money in the bank–if your portfolio goes down in value and you suddenly need cash; your emergency reserve is there to help you ride out the decline.
- Evaluate if you need equity returns to accomplish your goals and objectives. Meaning, based on much you can you save, what kind of interest rate do you need to accumulate enough money to do what you need to do. If it’s 1-3%, the local bank should become your favorite place. Anything more, means you have to take some RISK to achieve higher rates of return. If you can ride that risk, you should be compensated in the form of higher returns.
- Refer back to #1–it’s not a joke. Money in the bank makes everything OK.
- Your spending habits will have more of an affect on your financial future than your investing decisions.
It’s very important to remember to focus on things you can control. Things like; having money in the bank, controlling your spending, and taking on the amount of risk you can handle should consume more of your time than what the DOW or S&P has done for the last few days.
My suggestion is to use the rest of the month to get your financial house in order. After your financial plan has been built, then and only then circle back to your investments and adjust accordingly. At that point you will be able to justify your moves and not just shoot from the hip.
–Jared S. Friedman CFP®
