Take it from Warren Buffett, one of the richest men in the world and the most successful investor of all time: When the stock market careens around like a roller coaster that’s jumped the track, stay cool.
In other words, average investors don’t need to obsess over every twist and turn in the market, let alone hit the panic button when their 401(k) plan holdings lose value as volatility flares. That doesn’t mean ignoring your portfolio, of course–as usual in financial matters–it pays to remain attentive. But it does mean laying out your money goals for the long-term and periodically adjusting your investment strategy.
“Forget your passwords–every quarter you definitely need to look at your portfolio and manage and assess what your risk tolerance is and look at your long-term goals and see if your long-term goals are matching what your risk tolerance is,” said Jeanie Ahn, senior reporter for Yahoo Finance.
The upshot: Being a savvy investor almost always means keeping it simple. Ask yourself (or a trusted financial adviser) what those longer-term financial goals are and if what’s happening in the stock market at any given time affects them. A change in your financial needs and priorities might require a shift in your investment strategy.
Consider your financial goals
It’s important to consider where and how you plan to spend your money when deciding how much of it to invest in the stock market, Ahn said. “Are you going to be buying a home shortly? Do you need money for a down payment? Do you need funds for your small business? Things like that, you definitely shouldn’t have the majority of your funds in the market.”
Major life changes, like impending retirement, also may warrant a shakeup in your investment approach, as your financial goals shift. Meanwhile, be guided be common sense, and don’t put all your eggs in one basket. In other words, keep a diverse portfolio.
“You shouldn’t pick one, two, three stocks. You should make sure it is in a variety of different places,” Ahn said.
Time is on your side
The bottom line? Invest for the long run, and look past the market’s often bewildering daily gyrations. Don’t try to beat the stock market — especially at a time when computerized trading sends stocks rocketing up and down in mysterious ways — but rather know how to make it your friend.
“Over time, on average, your money will grow about eight to 10 percent year-over-year in the S&P,” Ahn said. “So if that is the case, then time is on your side. Time is your best friend.”