When the stock market dives, take a deep breath.
It may be counter-intuitive but rest assured, every seasoned financial professional will tell you that. Knee jerk moves with money often end badly.
Indeed, as the billionaire investor Warren Buffett once noted: “Unless you can watch your stock holding decline by 50 percent without becoming panic-stricken, you should not be in the stock market.”
It’s during these whipsawing times that the value of diversification — not having all your financial eggs in one basket — becomes ever more apparent.
“Diversification is key to successful investing over the long-term,” said Cliff Noreen, head of global investment strategy for MassMutual. “It helps a portfolio to weather market swings and provide returns over time that will help build a secure retirement.”
That’s not only important for what kind of stocks and bonds you’re invested in, but the kind of money vehicles and asset classes you have in your financial plan as well.
For instance, if your retirement relies solely on a stock portfolio, then market volatility likely is much more of a risk than a situation where your retirement will be supported by income from several different vehicles with varying degrees of correlation to market ups and downs. (Related: The power of perspective in turbulent times)
And that variety can allow for different strategies when markets go awry…like the option of using life insurance to supplement retirement income instead of a flagging equity portfolio. That’s because you can build cash value in a whole life policy, in addition to protecting your family.
Sudden market drops also point up the value of long-term investing horizons. The market comes back from every downturn. It always does. It just takes time.
“Markets can be volatile, which is why diversification and a focus on long-term goals are so important,” said Kelly Kowalski, a portfolio manager for MassMutual. “Diversification helps soften the impact of sudden retreats in certain types of investments. And a long-term mindset guards against ill-advised, panic moves that typically turn out to be counterproductive.”
Time horizons obviously will vary from person to person. A single young professional just starting out typically will have a longer time horizon than an older family man or woman looking at retirement in a few years.
Of course, that single young professional can make some choices that, in the long run, may make circumstances easier when he or she eventually becomes an older, family person. Some of those choices are straightforward, like contributing to retirement plans and taking advantage of company matches. But beyond those there are options for insurance and annuities that can soften market blows down the road.
Again, it’s a matter of personal circumstances that everyone has to consider.
A crazy market is just a good reminder to do it.
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