When the stock market gets rocky, focusing on your overall financial picture, combined with sound planning, can pay dividends. These 5 steps can help steady your pulse during market downturns and elevate your financial security:
1. Revisit your financial goals. Setting clear, prioritized goals—each with steps to achieve the goal, a price tag and a time frame—will help guide your investment approach. Good financial goals, tied to a sound long-term financial plan, typically will survive short-term market ups and downs. For example, a worthy goal for any year might be to save the IRS annual contribution limit in your company's 401(k). The steps are clear: know how much you're currently saving through your company's plan, then figure out how much more you need to save each pay period to reach the IRS contribution limit (use FINRA's 401(k) Save the Max calculator to find out). Next, work with your employer to implement.
2. Concentrate on asset concentration. A significant market movement can illuminate concentration risk, the risk of amplified losses that may occur from having a large portion of your holdings in a particular investment, asset class or market segment relative to your overall portfolio. It's important to diversify across, and within, the major asset classes. Do you hold multiple asset classes (such as stocks, bonds and real estate)? Are your stock holdings spread among different sectors (biotech, electronics, retail and emerging markets, to name a few)? Is your bond portfolio diversified by issuer and type of bond (corporate, municipal and Treasury)?
3. Focus on your financial security. Take advantage of day-to-day opportunities to help build your finances for the long term, such as paying your credit-card debt on time and in full, and setting aside funds for the unexpected (car repair) or the specific (vacation in Hawaii). The key is to automate. The winter months are a good time to set up an automatic payment plan (usually through your bank or credit union) to pay down credit card debt, or fund a savings account that will serve as your emergency fund or travel nest egg.
4. Understand the impact of changing interest rates. When stock markets are volatile, demand for fixed income products often rises, which in turn can drive up prices and depress yields. When interest rates eventually rise again, bond prices generally fall. But interest-rate risk is one of a number of factors to consider when you invest in bonds and other fixed-income products, such as bond mutual funds or ETFs. For example, duration risk, the name economists give to the risk associated with the sensitivity of a bond's price to a one percent change in interest rates, is another factor to keep in mind. You can find a bond fund's duration in the fund's Fact Sheet, often in the Bond Holding Statistics section. Finding the duration of an individual bond can be a bit trickier. Start by asking your investment professional or the bond's issuer. There are also online calculators available that compute an individual bond's duration.
5. Protect your money. Fraud is a growing threat, and financial scammers operate in all market conditions. In times of high market volatility, investors may be particularly vulnerable to pitches touting guarantees of "risk-free" returns. Combining a guarantee with a specific amount of money you will make—"this is a safe investment that will earn you $6,000 every quarter"—is a highly effective tactic known as phantom riches. You can avoid fraud by working only with registered investment professionals—use FINRA BrokerCheck to find out if a person is registered to sell securities—and by sticking to your pre-determined financial plan.
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