Expect the stock market to continue on a roller coaster ride.
The financial/credit crisis has focused a lot of attention on short-term market performance, yet this is usually not a good idea for long-term investors.
In normal markets, I would caution long-term investors to avoid becoming caught up in the hysteria that is daily market activity.
Real Problem for Investors
The real problem is not what the Dow does in daily trading, but when will you need to begin converting investments into income-producing assets.For most people, this switch comes as they approach retirement age. When you need income from your investments for living expenses, you become more concerned with preservation of capital and less interested in pure growth.
Many begin moving out of growth stocks and into income-producing stocks and bonds about 10 years before they anticipate retiring.
Because people are living longer (not a bad thing), they face a greater danger of outliving their money (not a good thing).
For this reason, many investors are keeping more of their assets in stocks than in prior years. The old rule was your age subtracted from 100 should equal the percentage of stocks in your portfolio at retirement.
Old Stock to Bond Rule
For example, if you retire at age 65, you should have 35 percent of your assets in stocks (100 - 65 = 35) and 65 percent in bonds and cash.Thanks to generally lower returns, the effects of inflation and longer retirements, many investors are modifying this rule and keeping more of their assets in stocks longer (subject to your tolerance for risk, of course).
If you are in this position when the market nosedives into a raging bear, you face some difficult choices.
If you liquidate your stock positions and retreat to cash, you may suffer loses of capital that will dramatically change your retirement plans.
If you stay invested, you have to hope a strong bull market follows the downturn and you can recover your lost capital.
Either way, there are risks. No one knows what the market will do in the short term.
If you have a sizable retirement portfolio, it may be worth your time to work out a game plan with a trusted advisor or fee-based financial planner.
You may need to sell some of your assets, plan on working an extra year or two or lower your retirement lifestyle expectations.
What about other Investors?
What about stock investors who are still years from these decisions? Is now a good time to pick up bargains or should you sit tight?There is no automatically right answer to that question. However, I would suggest you consider the long-term prospects for the U.S. economy.
If you believe those prospects are good, there is no reason to change your investment plans, although you may want to focus on reducing your personal debt (credit cards, car loans, home equity loans, and so on).
Eliminating as much personal debt as possible will make it easier to borrow in a tight credit market. Less debt means you aren’t paying high interest rates, which will almost always be higher than any return you can earn on a reasonable investment.
Crazy markets are nothing new, however they can make your life unsettled. There is no reason to believe our economy won’t work through tough times, however the passage may be very painful to some investors.
