Use investment as a tool to manage your money instead of letting it manage you, writes Donna Block
The market is cruel. It gives with no joy and takes with no mercy. If anyone’s forgotten this, the events of the past few weeks should serve as a reminder. Stock markets have been tumbling worldwide and the purveyors of doom are predicting more trouble.
Depending on your situation, things might not be so bad. It’s just time to test your mettle. If you paid attention to the investment brochures and really are invested for the long term, don’t panic: ride out the storm and remember what goes down does, eventually, come back up again.
On the other hand, if you’re heavily invested and facing a cash crunch, take some solace from the fact that there aren’t too many tall buildings in South Africa.
When markets gyrate, the most important thing to keep in mind is that the world is a much smaller place than it used to be – what shakes New York, rocks Johannesburg. But with higher risks come greater rewards and down markets offer great buys for investors with money to spend.
The problem is knowing when to get into, or out of, a position. Markets will continue to keep us guessing and the talking heads on television, radio and in the papers will try to make sense of it all.
Listening to analysts and strategists could either educate and empower or confuse. Some analysts are calling the recent downturn a crash, others are calling it an orderly decline, while still others are saying that the slump is good news because markets have been overvalued. At the end of the day, decisions to buy or sell rest squarely with you. It’s your money, not your broker’s, your best friend’s or the proverbial shoe-shine man’s.
Be prepared: there are no hard and fast rules, and no one is going call the market right all the time. The trick is to find a mix of stocks and bonds that you’re comfortable with and can afford to lose if the markets decline.
A downturn shouldn’t change your basic approach, but could give you an excuse to make some nifty new moves. If you had a shopping list of stocks you really liked before the market dropped, they may be on sale now at bargain basement prices, so be a buyer. If you are unhappy with a stock you already own and its outlook has deteriorated, you may want to get out, be a seller and try to roll it over into a new low-priced stock that shows promise.
Investors need to plan for the bad times as well as the good times. The best way to do this is to be honest and ask yourself a couple of basic questions.
Are you going to lose money you may need sometime soon? If the answer is yes, stay away from the market. Cash set aside for a house, school fees and living expenses for the next three to four years should not be invested in the stock market. Rather look at short-term bond funds or money market funds or banks. If you are living off your overdraft, stay out of the market, period.
Are you putting your long-term security at risk? The younger you are the less the risk as stocks tumble. The record shows that time is on your side. Those people who kept their heads and stayed in the market in the last world slump in 1987 made money in the long term.
If you are older and closer to retirement, you have a lot to lose. This is when a balanced portfolio – for example, half stocks and half short-term bonds -is the most important. The safe half of your money can tide you over during a falling market; the growth half will pay off later on.
The market will drive you crazy if you let it. So don’t let it; use it as a tool to manage your money instead of letting it manage you.
Easier said than done, especially when the market is trying to decide which way to go and events around the world can often set off a decline.
That’s what markets do, they are not rational; they go up and down, or up and up and sometimes down and down.
Sometimes they need a reason and sometimes they don’t. Just keep your cool and try to enjoy the ride.