This post is intended for individual investors who are 10 or more years away from retirement.
With the recent downturn in the financial markets, many investors are wary of their shrinking investment accounts. As an example, retirement account have been estimated to have lost more than $2 trillion dollars during the last 15 months. Having said that, every smart investment advisor I have heard urges investors with 10+ years before their retirement not to panic and remain steadfast with their investments.
Currently, investments of the last few years have most likely lost their value, but investors who regularly contribute to their portfolio are buying in at a low point. Although the market could fall further, the ongoing investments would buy in at the lower points too. This is known as dollar cost averaging and has been shown to work even during the Great Depression. For those who believe that the stock market will recover at some point, and every expert does, then buying in at a low point is basic common sense.
Another point to make is that absolutely no person knows when the stock markets will reach a bottom and moderate recoveries do occur just as quick as a crash. Whether they will recover to their historic highs in the near future is unlikely, but further down the road they should. At any rate, holding on a disproportionate amounts of cash instead of investing it is not the wisest and profitable investment for the long term, in any economic environment.
What many investors are doing now is to cash out their stock assets due to fear of additional market drops. This is only logical if the cash is needed for an emergency purpose or if the stocks of a given company do truly show signs of being a bad investment. For long term investors, with a diversified portfolio, panic is unwarranted. What is warranted is to be educated about investing, and I am personally upset at most news anchors on TV who know very little about economics and are exuding fear and sometimes outright panic in their broadcasts.
It has been historically shown that short term investors tend to have lower returns than long term investors. This is due to such investors who sell their stocks at low points and buy later at higher points, as an emotional response. Therefore, although currently the nest egg is shrinking, history is a good teacher in showing that long term investments is the most prudent approach.
It’s also a good idea to diversify ones investments since essentially every asset class has fallen in value. Diversification into real estate, dividend paying stocks, commodoties, or bonds is advisable. The objective is to have a well balanced portfolio that the investor actually understands and to be patient until the market upheaval is over.
