Stock Market Money Rules- January 27, 2008
Stewart H. Welch III, CFP, AEP
Founder, The Welch Group, LLC
January 27, 2008
Stock Market Money Rules
January 27, 2008
The recent stock market volatility has placed an exclamation point on the need for everyone to establish their own set of ‘Money Rules’. Here’s the backdrop: The sub-prime home mortgage debacle has set off a chain reaction of financial and economic events resulting in a global stock market sell-off. There’s an old saying, ‘When America sneezes, the rest of the world catches a cold’, or in the recent case, the world catches the flu. What has changed is that we are so much more globally connected, that when any major economy, be it
So what’s a person to do? I am certain many people had sleepless nights this past week as they pondered their own financial fate in the wake of the extreme market volatility as all major indices temporarily crossed into Bear Market territory on Wednesday. Here are my suggestions:
If you feel panic right now, consider meeting with your professional financial advisor. In many cases, following your instincts at a time when your emotions are extremely high will, in most cases, lead to your poorest decisions.
If you are five to ten years or more away from retirement, this is not the time to panic but rather an opportunity to buy stocks on sale. Use your money to invest in solid but beaten down companies. If possible, invest some money each month, known as dollar-cost- averaging. Buying into a declining market when you have a long time horizon is a good strategy.
If you are retired or less than 5-years from retirement and you have two to five years or more of cash flow needs in the form of money market funds, certificate of deposits or short to medium-term quality bonds, you’re in good shape and likely need to do nothing more than observe the events and learn the lessons offered.
On a bigger picture scale, use this experience as a wake-up call and an opportunity to establish your own set of written ‘Money Rules’. Money Rules are nothing more than your own set of guidelines for how you will manage your money during good times and bad. Determine the appropriate investment allocation for you based on your stage in life and your own risk tolerance. If you are young and have many years until retirement, invest more heavily in stocks and stock mutual funds and be sure you have a periodic investment plan where you are investing money each and every month. As your retirement date becomes more imminent, be sure to shift funds into money market, CDs and high quality shorter-term bonds to cover two to five or more years of needed cash flow. This will allow you to weather the stock market storms that are sure to come and go. Be sure your Money Rules include a statement of how you will adjust your portfolio during extreme bear markets and extreme bull markets. Being able to refer back to your written Money Rules during times of panic or euphoria may well be the thing that prevents you from making a big financial mistake.