The election is over and markets are wrestling with the results. More likely than not, as the country sorts out the election’s consequences and transition over the next few weeks, the market will continue to convulse, up and down.
Here's some advice ... take a deep breath; especially when you look at your 401(k) statement, whether online or on paper...
Every seasoned financial professional will tell you that stock market volatility is a reality of investing. The key is not letting short-term fluctuations unsettle your long-term plan. Making emotional and spur-of-the-moment moves can lead to potentially detrimental investment results. Long-term goals and strategies should always be kept in mind.
Indeed, sudden market drops point up the value of long term investing horizons. The market has recovered from every downturn. It’s not always smooth, and not always right away. But it always has.
And that’s a key to investing. Time smooths out returns and can help determine the appropriate level of risk an investor should take on. Not short term market moves. (Related: Why You Can Win with a Steady Investment Strategy)
Time horizons obviously will vary from person to person. A single young professional just starting out typically will have a longer time horizon than an older person looking at retirement in a few years.
Of course that single young professional can make some choices that, in the long run, may make circumstances easier when he or she eventually becomes an older, family person. Some of those choices are straightforward, like contributing to retirement plans and taking advantage of company matches. But beyond those there are options for insurance and annuities that can soften market blows down the road.
It’s during wild market moves that the value of diversification – not having all your financial eggs in one basket – becomes ever more apparent. That’s not only important for what kind of stocks and bonds you’re invested in, but the kind of money vehicles and asset classes you have in your financial plan as well.
For instance if your retirement income relies solely on a stock portfolio, then market volatility likely is much more of a risk than a situation where it’s supported by several different vehicles with varying degrees of correlation to market ups and downs.
And that variety can allow for different strategies when markets go awry…like the option of using life insurance to help supplement your retirement income instead of relying solely on a flagging equity portfolio. That’s because a whole life insurance policy builds cash value, in addition to protecting your family.
Again, with all these options it’s a matter of personal circumstances that everyone has to consider.
A turbulent stock market is just a good reminder to do it.
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