Guide for the Small Investor
The recent stock plunge has spooked some investors, especially after three years of a nearly continuous bull market. But before you panic, take stock and ask yourself these questions:
* Why are you in the stock market? If you need the money next month or even next year, a potentially volatile stock market is not the place to be. But if you are like most investors, you plan to invest for decades. Along the way, you must expect the market to go down. Sometimes it will go down a lot--but even the Depression-era bear market ended eventually. Unless you expect the world’s economy to fall apart in your lifetime, relax.
* When did you buy? Unless you bought in the last six months, you are likely to be ahead of where you were last year. The average stock could lose a lot of value and still be comfortably ahead of its 1991 close.
* Have you set up a regular investment pattern? If you are investing through a 401(k) or payroll deduction or use some other form of dollar-cost averaging, don’t stop. The whole point of such investing is to spend the same amount of money buying shares weekly, monthly or quarterly, regardless of where the market is. If it stays low, you’ll be buying more shares because prices are low. If the market is high again, you will be buying fewer shares.
* Do you have the right asset mix? If you have been fully invested in stocks and bonds, you’re at maximum risk for downturns, so it may be a good time to increase your cash. Conversely, if you have been holding on to a lot of cash, this is a logical time to start increasing your holdings.
* Why did you buy bonds? If you bought bonds to bet your capital on lower interest rates, you need to keep careful watch because rising interest rates are hurting you now. But if you own bonds for the regular long-term income, moderate changes in bond value and interest rates shouldn’t bother you. Your only fear is a rapid return of high inflation, something few analysts expect.
