No doubt, there has been a great deal of drama on Wall Street lately. However, long-term investors need to stay focused on their objectives and try to avoid being influenced by their emotions. That being said, money you need soon should not be invested in the stock market. It’s too risky to expose that money to market fluctuations. If you do, the money may not be there when you need it. Instead, look for safer alternatives to park money for short-term goals and keep your long-term money invested appropriately for your risk tolerance, time-horizon and goals.
Retirees, on the other hand, may have a more challenging issue to deal with when they continue to withdraw money from their portfolio during downturns. If staying the course isn’t an option, consider reducing your withdrawals. This forbes article, 5 tips To Survive Stock Market Volatility in Retirement, gives great advice to retirees for dealing with this potential problem.
To provide additional perspective on the recent stock market volatility, here are some thoughts and smart advice from Bob Veres, owner of Inside Information and former Editor of Financial Planning Magazine:
Since 1950, the U.S. markets have experienced a decline of between 5% and 10% (the territory we’re in already) in 35.5% of all calendar years—which is another way of saying that this recent drawdown is entirely normal. One in five years (22.6%) have experienced drawdowns of 10-15%, and 17.7% of our last 56 stock market years have seen downturns, at some point in the year, above 20%.
For long-term investors, the result is much the same as if you went to the grocery store and discovered that the prices had fallen roughly 5% across the board. At first, you might think this is a great bargain. But then you might wonder whether the prices will be even lower tomorrow or next week. One thing you probably WOULDN’T worry about is whether prices will eventually go back up; you know they always have in the past after these sale events expire.
Will they? The truth is, nobody knows—and if you see pundits on TV say with certainty that they know where the markets are going, your first impulse should be to laugh, and your second should be to check their track record for predicting the future. Without a working crystal ball, it’s hard to know whether the markets are entering a correction phase which will make stocks even cheaper to buy, or whether people will wake up and realize that they don’t have to share the panic of Chinese investors on this side of the ocean. The good news is there appears to be no major economic disruption like the Wall Street derivatives mess that triggered the 2008 downturn. The best, sanest investors will once again watch the markets for entertainment purposes—or just change the channel.