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Plan Well, Retire Well

Saving and investing your money

Dow Down 370 Points Today, 777 Points Last Monday: My Take

The stock market was Story #1 last Monday and again today with its significant swings both down and up. Newscasters were using words like "plummet" and "largest point drop in history."

What does this mean to you? What should you do, or not do? Here's a short check list.

  • If you chose you individual investments as part of an overall plan, selling should be done according to a plan as well, not as a knee-jerk reaction to current events.
    • An overall plan usually specifies what proportion of your invested money should be in large US company stocks, small US company stocks, foreign stocks, bonds, etc. (that's known as your asset allocation) based on your time horizon, goals, age, etc. And you might have decided that you would re-balance (buy or sell investments to bring your asset allocation back to those proportions) at regular intervals, perhaps once a year.
  • If you own individual stocks or sector funds, you are more vulnerable to market swings than if most of your investments are done through well-diversified mutual funds.
    • If an individual company goes out of business, your stock could become worthless. Individual corporate bonds simply put you in line with other creditors to see whether you can recover part of your investment. On the other hand, owning the "right" individual company stock could multiply your investment many times over. That's risk personified - a huge range of possible results.
    • Owning the stocks of many different companies through mutual funds is one way of controlling risk. It assures a return that is closer to the market average. You won't get the best return, but you won't get the worst return, either. And you're much less likely to lose all of your investment than you would be with individual company stocks.
    • Investing in a sector fund (a mutual fund that owns stocks just in one sector of the economy, such as financial companies or tech companies) has less risk than individual stocks, but much more risk than a broader stock mutual fund such as one that follows the Standard and Poor's 500, or another index.
  • If you realize that you took on too much risk and have too much money invested in individual stocks, or too large a proportion of your money in stock mutual funds, what should you do?
    • One strategy for moving out of one investment and into another is to sell a set amount (a dollar amount or a number of shares) to sell on a regular basis and invest in another investment that will balance out your portfolio. See my earlier post about what to do with company stock inside a 401(k) to learn about this strategy.

If you have a plan for your investments, it's easier to evaluate events like the past two Mondays and see whether you should take action. If you're worried now, perhaps the first thing you should do is make a plan!

Let me know your strategy for dealing with the gyrations of the market! Click on my name below and send me an email.

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