Let’s look back at what we have experienced in the last three months ending October 4th; July was down 3.41%, August -5.68%, September -7.18%…do you see a trend?? The drops are getting larger and that leaves many investors awry and wondering what to do. As an investor, you may be asking yourself…should I sell out and cut the cord? Should they buy to get more value in my purchase? Should I just not login to my account…ignorance is bliss, right?
There’s no wrong answer, other than the plea of ignorance that is. Each person’s situation is unique. But it’s difficult to claim that your position is unique if you don’t know where you stand. As an investor, where do you stand? What is the “sleep at night index”? Once you realize what your risk level is, then you know what type of investor you are and volatile times can be easier to contend with.
It starts at the beginning. Before you can put together an investment plan, you must understand what you’re trying to accomplish. You also need to know your personal limitations—your strengths and weaknesses. Are you patient? Do you tend to get nervous when times are tough? How well do you handle risk or chance?
First, consider where you are in your life in determining your goals, whether it’s buying a home or saving for retirement or your child’s college education.
Then you have to ask yourself how you can reach those goals. Is it important that you don’t lose any money with your investments? How much do you need to make from your investments to achieve your goals?
Your answers help shape your investment plan. If your goal is to avoid losing money, your investments will include more conservative items like money market funds or U.S. treasury bonds. If your goal is growth, your investments would be more aggressive and include growth and value stocks. If you’re somewhere in between, you’d likely own a mix of conservative and growth-oriented investments.
You also have to determine what type of return you want to generate from your investments. Are you trying to keep pace with inflation? Or do you want to beat the stock market?
Maybe most important, you need to know how much risk you are willing to take and how much volatility you can handle. Risk tolerance is hard to determine. No one is happy when their investments decrease in value, but most understand they have to accept some risk in exchange for seeing their investments go up over time. However, they may not understand it until they experience what it feels like when their investments lose value.
Once you know your comfort level with risk and volatility, you can develop an investment plan that suits you. Then, when chaos and volatility hit the stock markets, you’ll rest easier knowing that you have the right plan in place.
As always, we’ll be here to help.