Many investors are concerned with volatility in the stock market as this new year starts. They fear that their nest egg is going to be wiped out by the credit crunch, a troubled housing industry with suprime mortgage defaults and the potential for further difficulties for hedge funds, banks and financial service companies. There is no doubt that hedge fund trading adds to the market volatility.
Volatility and risk are two different things. It is worth making the difference between them. Volatility is characterized mostly by a security, commodity or market that rise and fall sharply within a short-term period. Now how about risk? It is the possibility of an investment losing value.
So if you are a mutual fund investor who is concerned about volatility in the stock market, here are a few things you can do to reduce the volatility of your portfolio.
1. Make sure there is a good line of communication between you and your financial adviser. Go ahead and meet with your financial adviser to re-examine your investment goals, risk tolerance and financial circumstances. Now that you are at the start of this new year, this is a good time to do it. Talk about any changes that may occur in your investments. If you have changed jobs or decided to take an early retirement, here is a good time to start talking about these topics. Ask yourself many other questions. Did you get married? Did you have a child or become a grandparent? Has there been a divorce? Is your son or daughter needing money for college? Does your investment mix still make sense or put you at ease or in sync with your goals?
If you are in a volatile market, you may want to re-examine your strategy, even though you might not want to make major moves. Have you considered buying more shares of your mutual funds when prices are down? Everything depends on your personal situation. Remember that you are in it for the long term. If nothing has changed, then it may be a good idea to change your financial plan. Many investors often feel a sense of panic when things are not going the way they expected them to. So they hurry to pull out. That is a major mistake. Patience is a virtue that needs to be practiced at this point. History shows that the market has recovered.
2. The other thing you should do is to diversify your nest eggs. The idea is to spread your risks by investing in a carefully selected mix of mutual funds that invest in stocks, bonds and money market instruments. It is good to have a mix of domestic, international and global funds. Keep in mind that in the past few years, international equity mutual funds have generally done fairly well or even better than U.S.-focused mutual funds. Discuss other risks such as currency fluctuations and different accounting standards.
3. Invest in volatile markets. The idea is that volatile markets do not have to be seen as something to be feared and stay away from. Investing at regular intervals helps you pick some good companies. You can buy more shares when the price is down. Buying good companies at lower prices through your mutual funds is the name of the game. Very few people will want to continue making investments when stock prices are declining and stock market news is negative.
4. During market volatility, make sure to invest for income. Count on the dividend when the stock price is going up or going down. Stocks that have a history of paying regular dividends have tended to fare well. The stock prices of the companies may be affected, but that does not mean these companies are faring poorly. Think about bonds and money market instruments which tend to produce a steady flow of interest payments. They can help cushion your portfolio during stock volatility. Now that you know how to manage your funds, take advantage of any combination of instruments that may help you make money.
The New York Times has just published an article on a bunch of personal finance sites. Some of them are noted above. If you want to get some good info on finance, you can start right here. Yahoo Finance is also a good spot to drop by.
Should You Pay Your Mortgage or Not Pay It Off? The question is whether you should pay it or not
USA Today published a recent article on this issue (www.usatoday.com/money/perfi/housing...) How would you answer such a question?
It all depends on the following: financial circumstances, time to retirement and emotions or self-control
Get commonsense, good advice from Vanguard. In other words, listen to what most parents will tell their kids. Live within your limits.
"1. Live below your means. You have to spend less than you earn. The investment benefits are self-evident. If you don't save, you can't invest. But living below your means also provides protection from volatility in your personal financial situation. If you suffer financial setbacks—job loss, unexpected health-care costs—you'll be better positioned to weather those challenges than people who habitually spend every penny they earn.
2. Participate in the markets. More important than picking the optimal investments is simply getting started. Once you start investing, you face another challenge: volatility. The financial markets have recently provided a very good illustration of volatility. From its May high to its June low, the U.S. stock market lost almost 10% of its value in a few short weeks this year. If you can resist the urge to react to the emotional potholes created by short-term fluctuations in the value of your investments, riding along with (and continuing to invest in) the markets will be a productive experience over many years.
3. Invest regularly. A regular saving and investing habit is key to financial success and security. Payroll deductions, a feature of most employer-based savings plans, and other automatic investment programs make the mechanics of regular investing simple.
4. Get knowledgeable. Your goal should be to become familiar with the way the markets behave. Over time, this familiarity will help you establish—and stick with—a well-constructed long-term investment plan."
Get Vanguard Diehards at socialize.morningstar.com
Visit National Association of Personal Financial Advisors at http://napfa.com/index2.htm