Watching the stock market can be both exciting and frightening. It’s great to see it go up, but watching a downward slide can be emotionally difficult. Matt Allgeyer, Financial Planner at Wamhoff Financial Planning & Accounting Services, talks about market volatility, financial planning and preparing for retirement. He offers the top three things people need to know in times like this:
What meaning should you attach to the number itself?
- Over the past couple of years, we’ve gotten used to seeing some big numbers. The Dow was well over 18,000 last year! But those big numbers need to be put into perspective.
- While there’s not a great deal of meaning in the number itself, people often attach meaning to it, and that sometimes triggers emotional buying and selling in the market.
- In our opinion, this dip is NOT a signal to sell. People often make the mistake of chasing the market and potentially reduce the return in their investment.
- In our opinion, this dip is NOT a signal to young people that it’s not safe to invest. When looking at a 40 year graph it still looks like we’re on top of a mountain.
How can you take emotion out of the equation?
- When the Dow was high last year, you were probably watching your 401K and IRA and liked what you were seeing, sleeping well and maybe planning your next large purchase. Not so much right now.
- There are two things you want to manage with respect to long term financial planning: The amount of resources you have available after you retire, and the quality of your life before you retire.
- Developing a strategic plan with a professional helps you accomplish BOTH.
- When you have a plan, you see the big picture and know what you’re working towards. You’ll also see various scenarios in your planning so that you know what to anticipate when it comes to how the market will impact your portfolio in times of highs and lows. This helps to remove that emotional trigger.
Should I be more afraid of market lows the closer I get to retirement?
- The key is to have a plan and actively manage it – and that means that your portfolio will need to change as you get closer to retirement.
- Asset allocation is one of the most important things to pay attention to. However, asset allocation does not does not guarantee a profit or protect against loss.
- As you get closer to the time when you want to use that money, it’s important to have it in less volatile investment vehicles to help mitigate your risk. That typically means less growth potential because your risk tolerance typically is reduced as you get older.
- On the other hand, a 24 year old single female with a great career and high tolerance for risk would typically be more highly invested in the stock market as that young person is in a growth and accumulation mode.