Market Swings

by Kevin on February 7, 2008

A few weeks ago there was a huge swing in the market over the Monday holiday. A lot of people were predicting a crash — some international markets fell 5%+. The Fed jumped in and cut the market rate 3/4ths of a point. The US markets went down, but seemed to have recovered.

http://www.mississauga4sale.com/images/Market-Emotions-Cycle2.jpg

That link pretty much sums up my thoughts on investing in the stock market. Most individuals sell high and buy low — the exact opposite of what you want to do. Stick to your investment plan, and invest regularly. Don’t try to time the market.

Or, as Warren Buffett puts it, “…try to be fearful when others are greedy and greedy when others are fearful.” That pretty much sums up the chart.

So how do you stay the course and follow Warren’s advice?

Set a day each year to review your asset allocation. I picked April Fools Day to reviews ours. If your target allocation is 90% stock funds and 10% bond funds, you look at all of your investments and see where you stand. If your stock funds have grown, your current allocation may be 93% and 7% bonds. You either sell off some of the stock investments and buy more bond funds, or you elect to simply put more money into the bond fund in the coming months. The latter would require more monitoring to make sure you were in line with your allocation, as you don’t want to miss any opportunities to buy more of the stock mutual funds at a lower price.

The best option is to not freak out when the market swings up and down. It worked for Warren!

{ 2 comments }

Allen Taylor February 7, 2008 at 8:34 am

I found your site on technorati and read a few of your other posts. Keep up the good work. I just added your RSS feed to my Google News Reader. Looking forward to reading more from you.

Allen Taylor

Mark Argentino February 7, 2008 at 7:14 pm

Great article and nice graph ;-)) I agree with you, DCA – dollar cost averaging by contributing a smaller amount every week of every month of every year over 10 to 30 years will do you far better than trying to beat the market.

All the best!
Mark

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