The questions that are flooding in today -- from young investors, people in their peak earning years and retirees alike -- have a common theme: Where can I safely put my money? We're all emotionally drained by seeing the value of our portfolios decline. At the same time, we are skeptical of the traditional wisdom that tells us to "invest for the long term." But sitting on the sidelines doesn't feel quite right either.
Here's an example. A reader nearing retirement has watched the value of her 401(k) (in her words) "evaporate." She doesn't want to stop contributing, but she's concerned about putting new money into investments that may continue to decline. She's a longtime investor whose faith in the market has been shaken. At the same time, she understands that she still has to save for the future. What should she -- and so many millions of others like her -- do?
Decide what kind of investor you really are.
My advice to this reader, and to anyone who is rethinking their approach to investing, starts with understanding your own psychology. Now's the time to take an honest look at your true feelings about risk and the goals that are most important to you. Remember, it's easy to be an aggressive investor in an up market. But it's times like these that give you a fuller picture; that really show you where you stand. And once you acknowledge that, you can take action -- and retake control of your portfolio.
Start by taking a look at how you've decided to divvy up your portfolio between stocks, fixed income and cash (your "asset allocation"). Would you choose the same mix today? When choosing a target asset allocation, you're often asked questions about how long you have to invest, whether you're more concerned with gain or loss, and how much of a loss you think you can comfortably handle. This is a good time to ask yourself those questions once again. If retirement is right around the corner, you might well want to start moving out of stocks toward fixed income and cash. But if you're not going to retire for decades, you might decide that an aggressive portfolio still fits the bill.
If you decide it's time to rebalance, you'll probably have to do some buying and selling. But that doesn't necessarily mean that you have to sell at a loss. You can also bring your portfolio into balance by carefully deciding how to invest the money you're currently saving. For instance, to create a more conservative asset allocation, you could decide to avoid stocks for a while and put any "new money" into bonds and other fixed income investments. The potential for gain is less -- but so is the potential for loss.
Try a gradual rather than an all-or-nothing approach.