Money cash Shekels currency 521.
(photo credit: Reuters)
Are you ready for the next big stock-market move, either up or down? We all hear stories about how so and so knew that the market was about to crash and sold off his entire portfolio, or another who knew exactly when the market had reached its low and invested everything he had and became a multimillionaire.
Sounds easy, right? Wrong! As my mother of, blessed memory, was fond of saying, “A na’ar is a navi” (prophecy was given to fools).
As we all know, it’s impossible to predict the future; even our trusted weathermen with the most sophisticated scientific instruments at their disposal can’t tell us what the weather will be in two days from now. What we can do is draw on past experience and history – and learn from it and try and create a plan based on past circumstances or patterns that may be similar to today’s circumstances.
It’s certainly no guarantee to predict the future, but it can be used a guide to help us navigate through unchartered waters. With a little perspective you can avoid mistakes many investors make in both rising and falling markets.
Be clear about your long-term goals Many financial advisers suggest sitting down with a pencil and paper and writing down what are your long-term goals.
It’s important to be as specific as possible because this will impact your saving and investing goals as well. After defining your goals you need to invest your money in a way that will enable you to achieve your goals.
Review how your assets are allocated (how your assets are broken up, such as international stocks, real estate, large-cap stocks, small-cap stocks, bonds or cash) and make sure you have a well-diversified portfolio. If you have defined your goals, understand why you have chosen certain investments and diversified appropriately, you will be able to avoid common mistakes made during volatile markets.
Nothing goes up in a straight line Investors often think that nothing needs to be done to their portfolios when markets are rising and their portfolio value is rising as well. Unfortunately, even in rising markets mistakes can be made. It’s important to remember that markets don’t always move up; they can drop as well.
For younger investors, market gyrations are less problematic. For retirees or those fast approaching retirement, the need to preserve your capital becomes much more important.
Chances are that once you hit retirement age, what you managed to save is what you will have to live off of, in addition to pension monies and Bituach Leumi (social security). Having a portfolio that is overly aggressive can blow up in your face if the market gets slammed.
Don’t forget about asset allocation The recent market upswing has been driven by certain segments of the market such as tech stocks and dividend-paying stocks. Make sure that your portfolio stays in balance. For example, if you had 5 percent exposure to technology, and now after the run-up you have 10% exposure, you need to pare back on your holding.
“There’s another possible problem with bull markets,” says Albert Fredman, a professor emeritus of finance at California State University in Fullerton. “It’s the so-called ‘house money effect,’ where people feel they’re investing with ‘house money’ (money they ‘won’ from the house). They become very aggressive and are more willing to speculate than they used to be.”
When the market is strong, some investors lose sight of their long-term goals and focus just on how much they’re making in the short run, he says. But if you start focusing on the short term, you might take on more risk than you should.
Be patient. It helps to remember the most important rule of investing for retirement: You’re investing for the long term, not to get rich tomorrow.
email@example.com Aaron Katsman is a licensed financial adviser in Israel and the United States who helps people with US investment accounts.