The latest market downturn was accompanied by countless stories of women who panicked and sold at the bottom and were too scared to get back in, even after a 70% + bounce back. Buying high and selling low is clearly not an effective strategy. Here are five simple questions to see if you’ve got what it takes to be an investor.
- Will you sell if there’s a 20% drop?
20% market corrections are the norm. If you can’t tolerate volatility, you don’t belong in the stock market. - Do you need the money within five years?
If you do, you should put your money in insured CDs or Treasury bills. The volatility in the stock market increases your odds of needing your money when prices are down. And selling low is not a good strategy. - Do you know what kind of investor you are?
Value investors (like Warren Buffett) buy on sale (when nobody else wants to invest), and hold on to their investments indefinitely.
Growth investors buy fast growing companies and sell the second the growth slows (hopefully before everybody else does). Growth investors have to be VERY good at researching companies and timing sales, or the additional trading costs and tax on gains will greatly diminish their returns.
Asset allocators choose a mix of stock and bonds that reflect their level of risk they can tolerate, buy a mix of investments, and reallocate every year to keep their mix consistent with their risk tolerance and goals.People who jump back and forth following the latest investment trends generally buy high and sell low. I do not recommend this type of investing.
- Are you committed?
Twice in my career I’ve seen drops of 50%+ in the market. This doesn’t happen often, but it has happened twice since the seventies. If you sell during these drops, you’re guaranteed to lose money. Only investors who are committed to the process belong in the market. Otherwise, they’re just making money for their advisors. - Do you know the consequences of keeping your money in safe investments?
This is long term financial suicide for women. A combination of inflation, taxes and longevity, not to mention the fact that we earn less than men and are more likely to be unpaid family caregivers during our productive earning years, makes risk aversion one of the main reasons that poverty levels among elderly women are twice that of men.
If investing were easy, everybody would be rich. It takes time, courage and commitment. But it beats being old and poor.
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I never sold at 20% drop.
I am an asset allocator type investor (retired).
I am nervous at times but remain committed.
Good for you, Elisa.
For a little perspective, the Dow Jones Industrial Average closed at 88.78 on May 25, 1910. On May 26, 2010 it closed at 10,043.75. Through a Depression, recessions, two world wars, the undeniable direction is up.
I am holding, holding, smouldering on. I try to watch my investments daily and everytime the computer acts up, that is the day the Dow drops sharply. I’ve been astute in making $$s, but antsy when conditions are as they are presently. As you said, I am looking to the direction of up. I have taken funds out and will pay some credit with the present sequence of events.
The Gulfcoast situation has made me ill and I can’t fanthom what recourse this will take on the market either. Thank you for your suggestions.
Hi Lady Quail, and thanks for your comment. Remember as you look at your portfolio, that you’re in for the long term. Watching daily price movements are, as a wise colleague once said to me, like driving from LA to NY, and stopping every mile to see your progress.
Best of luck to you, and I join you in empathy for our neighbors in the Gulf coast, who have survived more than their share of disasters.
I am getting a divorce and will need to make what I have grow, but don’t really know where to begin. Does anyone know of some beginner books to read about the lingo these articles use. Suggestions to read publications and research companies does not make sence if I can’t understand what they are saying. Any suggested books or websites to start?
Mary Buffett’s “Buffettology” is a great place to start.
Thanks for reminding me. The market’s down. Time to invest that IRA money that’s just sitting there!!! I want value, growth and dividends. If all else fails the dividends are a salve to my investment psyche. What are the 4 or 5 research pointers we need to do?
http://womensfinancialplanning.blogspot.com/search?q=investing
This article may be of some help to you.
The stock market resembles gambling in many ways. The best thing is to use someone else’s money. Example if you have a 401K where your employer match’s a percent of your contributions. Make sure you contribute to the plan so you receive all of the employer’s match.
I found stocks that paid a good dividend beneficial for my portfolio. When the stock went down I just bought more. Why? Because the interest rate I received increased. I always had the potential for increases in the up market.
Another way to protect your investment is to keep an eye on your portfolio whether 401K or a mutual funds. Look at the distribution. If the economy is stable, growing, and global economy is doing well. You can re balance higher allocations to Emergent markets and higher risk stocks. Timelines dictating when you’ll require payouts of your investments also dictate allocation. When the economy is in distress as it has in the last couple years, due to housing, financials, and employment, I reallocated with heavier distribution in money market and low risk bonds. That way when the market fell I wasn’t effected because I’d reallocated. Not wise to base allocations on market sector fluctuations however. As the market recovered I re balanced for more risk. Stock carry the most risk but potential for good return, then bonds, and least risk is cash (money market funds) but very low return especially in today’s financial climate.
As Kitty says, individual risk tolerance and timing have a lot to do with how you invest. For sure, buying high and selling low is financial suicide. But watching the economy and trends, reallocating when necessary, and balancing risk with return are all good strategies.
Excellent advice, bluerati. You are definitely a smartypants.