Those Volatile Markets
With the recent fluctuations in the US and International Equity Markets, investors seem to be feeling a bit squeamish. Over time, this feeling of uneasiness festers and may induce a reaction that may not be altogether beneficial for someone’s investment portfolio. It does, however, underscore the need for a proper process when investing money in the Capital Markets. Here are some points to consider:
Understand Your Capacity for Taking Risks
If the recent market movements made your stomach ache, then you may want to reconsider the investments that you are making with your hard-earned funds; you could be taking on too much risk by investing too aggressively for your tolerance levels. Such discomfort can sometimes force poor decision-making.
Asset Allocate Accordingly
Simply owning a few diversified mutual funds does equate to allocating your investment portfolio appropriately with your risk comfort levels. A proper allocation should consider other important aspects such as the amount of equity (stock) vs. the amount of fixed income (bond) or the amount of Non-U.S. (international) equity vs. U.S. (domestic) equity. Of course, the right mix will depend upon your comfort with investments.
Take a Long-term View
Capitalism is an economic system in which capital is “invested” in the production, distribution, and trade of goods or services for “profit.” Without profit and growth, Capitalism becomes like a three-legged table – essentially just a pile of wood. “Investors” take part in this system by trading their capital (i.e. investing your savings in a company) for a future profit. In doing so, they must measure performance over the longer-term – time periods typically greater than 5 years. “Speculators” are concerned with shorter-term profits and measure performance over the shorter-term – time periods typically less than five years. A good question to ask yourself is “Are you an investor or a speculator?”
Anytime there is a blip on the “investment radar,” take some time to revisit your goals, your savings patterns, and your timeframe for investment. If you are comfortable with the risks and are saving enough to meet your goals, then such market movements shouldn’t really affect you. Your comfort levels will be maintained by what is known and controllable (your savings rates and taxes) rather than by what is unknown (the market’s future movements).