When Volatility Comes, It’s Time For a Review

With the major shift we’ve seen in the economy over the past few years, everyone is a bit nervous about the state of their finances. The housing industry has definitely made America uncomfortable. Foreclosures are still happening. Companies are still letting employees go. Many people are finding themselves unprepared for unexpected retirements.

Other companies are going out of business or filing for bankruptcy protection. Lending guidelines have tightened so much that even people with good credit are having a hard time refinancing.

With all of the chaos, that nervousness has spread into Wall Street. The market has recently seen some of its worst days in years. Investors are worried about the economy, so they are pulling their money out of stocks and moving to conservative money markets. The influx of capital into the money market has been astronomical.

So, what do we make of all this? Should we follow suit and move our funds too? Should we sit back and wait?

Pulling your money out at the first sign of trouble is not the best response. We need to invest intelligently and not let emotions get in the way.

The best advice that I can give you without knowing your personal situation is to review your current portfolio. Double checking your investments never hurts.

What am I looking for?

The best way to determine whether you are prepared to weather this storm is to make sure that you are properly diversified. Remember that old saying, “Don’t put all of your eggs in one basket?” That truly applies when it comes to your investments.

True diversification means that your money is spread across different sectors, different types of companies, and different countries. If you have a little bit spread out over many different places, the impact of any potential catastrophe will be minimal.

In diversifying among sectors, you want to make sure that you aren’t over-invested in any one category. In the early part of the century, many investors put most of their money in the internet or technology sector. We all heard about people who lost everything in the “Dot Bomb.” Real Estate had a good run, too – until recently. Those who didn’t see things changing lost large amounts of money. So, spread your money across many sectors, rather than focusing on what’s hot right now.

We also want to spread our money among different types of companies. Funds should be spread out among large, mid-sized, and small companies. Each style has its turn to shine, so stay invested across the board, and you will do fine.

Lastly, we want to make sure that we have international exposure. While we do live in a great country, we don’t want to miss out on potential opportunities that may come from an emerging country. This will give us even more balance to weather the storms.

I want to give you two last things to remember. First, keep in mind that everything cannot be down at the same time. Every category has its cycle. If you stay invested everywhere, you will be ready for the increase when it comes around.

Second, having money in multiple mutual funds may look good on the surface, but that doesn’t ensure that you are properly diversified. Review your prospectus to see exactly how funds are allocated within the mutual funds to make sure that your overall portfolio is properly diversified.

Leave a Reply

Your email address will not be published. Required fields are marked *