Take care with investments in a volatile stock market
Many people have been getting a wakeup call recently from Wall Street. The stock market has become very volatile. We saw a day when the Dow dropped more than 800 points. In just two days, it was down more than 1,300 points. On Tuesday, it was up by 500 points-plus.
What can we learn from this roller-coaster ride? Probably several things we should already know.
There is not much doubt the economy is as strong as it has been for a long time, and is growing. Unemployment is at record lows we have not seen for decades and there are help-wanted signs everywhere. Business profits are still strong and regulations and taxes have been cut.
There also are things that should cause some concern. We may be on the brink of a trade war. There is a lot of political unrest at home and abroad. Interest rates are a rising concern because inflation is increasing. The deficit has increased and Washington is still in gridlock.
Many people I talk to know they are taking too much risk in the stock market. They are watching it closely. People are afraid they will miss the next upswing. Some believe they do not have any investment options.
History tells us that, long term, the stock market will be higher. If you have a long enough time line and are willing to tolerate downturns, that is the place to invest. No investment should make you lose sleep.
The major unknowns are when a correction will come, how fall will it far and how long will it last. While no one knows the answers ahead of time, history tells us a correction will come sometime.
If you are young and don’t need the money for years, you do not need to be as concerned about the above questions. Just keep investing regularly. If your current balance goes down and you don’t need to access the funds, it is only a paper loss if it recovers before you need the money.
By continuing to invest during a downturn, you are dollar cost averaging. Although this does not guarantee a profit, it often gives you a lower share price. This is because you buy more shares for the same investment when the market is down and less for the same investment when the market is up.
If you are older or need the money in the short term, the stock market is probably not the place for your investment. If you need income from your IRA or 401(k), and there is a big market correction early in your retirement, it can be devastating. You could run out of money during retirement if this situation occurred. As we say several times every year, your market money must always be in the market and your non-market money should never be in the market.
Some Wall Street promoters will be calling this latest downturn a buying opportunity. That is how they try to get your money. If it was overpriced last week, it probably isn’t a good deal today. How high the market may go now is anyone’s guess, but we know the market is not cheap right now. There may be other investment options that we will discuss in a future column.
If your money needs to be reallocated, do it now. Do not try to find the perfect day because that is almost as hard as hitting the lottery jackpot. Make sure you have the income you need to take care of your family.
Gary Boatman is a Monessen-based certified financial planner and author of “Your Financial Compass: Safe passage through the turbulent waters of taxes, income planning and market volatility.”
To submit columns on financial planning or investing, email Rick Shrum at rshrum@observer-reporter.com.