Truly good horror stories are able to blend tension and fear in a sustained pattern. The best spine-chillers build terror rather than springing it on us; the writer weaves a tale that leaves us with a feeling of constant anxiety.
I couldn't help but think that some investors have inserted themselves into a horror story of their own imagining.
It's possible to spiral into a fear- and anxiety-driven frenzy where the ultimate fright is losing one's retirement savings. Here's how such a tale of horror could read in an investor's mind (imagine this being spoken with increasing volume, pitch, and speed as hysteria sets in): In 2008, the market dropped. I lost some money. 2009 was shaky. The recovery has been bumpy. I still remember when the dotcom bubble burst! And what about the 1970s recession? And the Great Depression? And now economic numbers are mixed. I'm afraid I'll lose all my money! Should I get out or go all-in or move to gold or buy more company stock?
Stop. Close the book. Retirement investing shouldn't be like a horror story.
While past performance is no guarantee of future performance, repeat this mantra: The long-term trajectory of the American stock market is upward, and there are lots of ways to fight short-term volatility and help lessen risk.
Here are five fear-fighting maneuvers you can use to help battle the monsters of volatility and risk:
1. Diversify across asset classes. Diversification is spreading your money across many different investments to help reduce risk -- so losses in one area have a much smaller overall effect on your net worth.
Asset class diversification means spreading your money across different investment categories, with a percentage of your portfolio allotted to each in accordance with your personal goals and risk tolerance. The major asset class categories such as -- bonds and cash equivalents, large-cap funds, mid-cap funds, small-cap funds, international funds, and real estate -- are broad and able to encompass many geographic regions and sectors of the economy, or industries. Diversifying across asset classes can be more comprehensive and wide-ranging than some other forms of diversification. It may be a good way to help reduce risk and lessen volatility within your retirement portfolio.
2. Review and rebalance your lineup regularly. Reviewing exactly how your money is divided among asset classes on a regular basis -- quarterly or bi-annually -- allows you to make modifications based on market conditions, economic tides and changes to your own financial situation that may affect your investing strategy.
After a quick review of your portfolio, you likely will need to rebalance -- even if you've decided to retain the same allocation you had originally set. That's because over time, your investments grow more in some areas and less in others, so you no longer have the percentage breakdown you purposefully selected. Rebalancing can help keep you on track.
3. Invest through dollar-cost averaging. Rather than haphazardly dumping your money into investments or, worse, attempting to time the market, dollar-cost averaging means you invest a set sum of money at regular intervals -- like every two weeks or once a month. Dollar-cost averaging can set you on a course of investing when the market is up as well as when it's down. It eliminates the urge to think about market timing. The long-term effect of dollar-cost averaging is intended to be more stable than that of sporadic investing.
4. Don't overload on company stock. Many companies make contributions to employee retirement plans in the form of company stock, and there's no reason to turn that down. But choosing to invest additional money in company stock limits your diversification in two significant ways: First, a stock is not as diversified as a mutual fund, so mutual fund investments are generally preferable in retirement plans. Second, you already rely on your company's success for your current income. You're really putting a lot of eggs in one basket if your company's performance also has a large effect on your retirement savings.
5. Don't become attached to a particular investment or asset class. If an investment or asset class has performed well and helped you to make money in the past, it's easy to develop an attachment. On the flip side, sometimes it's hard to let go of an investment that's lost a lot of value because you want to get your money back before you sell it.
Cut those emotional strings, because emotional attachments have no place in investing. Every decision you make as an investor should be based on the suitability of funds for your personal situation and goals. Forget the past and the impact certain investments may have had on your portfolio. Instead, decide which investments will be most appropriate from this moment onward.
Scott Holsopple is the president of Smart401k, offering easy-to-use, cost-effective 401(k) advice and solutions for the everyday investor. His advice has been featured on various news outlets, including FOX Business, USA Today and The Wall Street Journal.
- Personal Investing Ideas & Strategies