Amazing, isn't it, how a few days of roller-coaster stock prices can unleash a flood of dire predictions? My question: If these seers can really discern the future so clearly, why didn't they warn us before the market started going haywire last week? Rather than act on predictions that are essentially guesses, I recommend you follow these three rules for coping with tumultuous periods in the market.
1. Stay informed, but remain calm. Pundits love to pontificate. So if the stock market gets off to its worst-ever start of the year as it did last week, it's inevitable that many market watchers will extrapolate a downward path for stock prices leading to Armageddon. But the reality is that no one really knows whether the market's recent gyrations are the start of a steep drop that will culminate in a bear market or are just another scary blip from which stocks will recover, as they did after last summer's 12% decline. Or, for that matter, whether a completely different scenario will unfold.
Which is why it's imperative that you don't get swept up in the titillating headlines, the shrill forecasts, the fever charts showing stock prices falling off a cliff, the non-stop chatter...in short, all the hype and drama that can create the impression that the economy and the markets are going to pieces and lead you to make unnecessary (and ultimately unhelpful) moves with your finances.
That's not to say you should ignore the news. As an investor and the steward of your retirement savings, you want keep up with developments in the markets here and abroad. But you don't have follow the Dow's moves minute-by-minute or track the price of oil in real time to do that. Checking with a financial news site once or twice a day, switching on the TV during a workout or, if you're old-school, reading the the financial section of the newspaper every day is enough to stay abreast of what's going on.
2. Review your portfolio—and then leave it alone. The key to dealing with market volatility and sharp setbacks in the market is preparing ahead of time. If you've created a well-thought-out investing strategy and are positioned for the long-term, you don't need to scramble to make changes every time the market swoons.
So if you haven't done so already, take the time now to ensure your portfolio is invested in a way that matches your tolerance for risk and that's consistent with your financial goals (saving for retirement, transitioning to retirement, spending down your nest egg, whatever). You can do that by completing a risk tolerance-asset allocation questionnaire and then doing this 15-minute portfolio check-up. If you're not comfortable going through this sort of relatively simple exercise on your own, consider hiring a financial adviser for help.
Once you're satisfied that you've got a portfolio you can stick with whether the markets are struggling or thriving, your work is pretty much done. Indeed, other than periodically rebalancing your stocks-bonds mix and perhaps re-doing that risk tolerance review and portfolio check-up once a year to make sure your investment strategy is still on track, you want to resist the urge to tinker or, worse yet, make radical moves.
3. Set a cooling-off period. Sometimes even when we've taken the effort to adopt a long-term strategy, our fears get the better of us and we abandon our plan in the name of immediate safety. To avoid making possibly self-defeating decisions when emotions are running high, I suggest you employ what behavioral economists call a "commitment device, " essentially a technique to help you behave (or avoid behaving) a certain way in the future.
One of the best-known examples of a commitment device can be found in Homer's epic poem The Odyssey, when Ulysses lashes himself to the mast of his ship in order to avoid steering toward the seductive song of the Sirens and wrecking his ship on the rocks. But you don't have to do anything so extreme. Rather, simply make a deal with yourself—and preferably put it in writing so you'll be less apt to renege—that you'll wait at least certain period of time (I'd say seven days to two weeks) before engaging in any kind of a major move during a period of market upheaval, such as selling stocks and moving a big chunk of your retirement savings into cash.
The idea is to give you a chance to calm down instead of making a rash decision that you may later regret. I suspect that in most cases a little cooling off period will be enough to stifle the urge to make a move, or at least a radical one. But even if you still end up making a significant change, chances are you'll have weighed the implications more rationally than had you simply rushed ahead in the heat of the moment.
Walter Updegrave is the editor of RealDealRetirement.com. If you have a question on retirement or investing that you would like Walter to answer online, send it to him at email@example.com. You can tweet Walter at @RealDealRetire.