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Ted Allrich is the founder of The Online Investor and author of the just released book: Comfort Zone Investing: Build Wealth And Sleep Well At Night. In this weekly column, he'll offer advice to investors who are just getting started.The stock market has gyrated wildly lately, up 130 points in one day, down 185 points the next, only to go back up 100 points the following day. Which way is this thing going? Should you hold on or jump off? Or should you be buying now? No one knows where it's going but here are a few ways to lower your stress during these turbulent times.
First, don't over invest. When the market is this volatile, take some of your profits off the table. If there is a clear, positive indicator that the market will do better because of increasing earnings or interest rates are going lower (unless there's a recession in the making), then you can put more money back into stocks. But right now may be a good time to take a more wait-and-see attitude than being fully invested with a lot of hope. Do not, however, get all the way out of the market. Trying to time the market is the same as telling the future: You can't do it (nor can anyone). Always stay in the market with some of your investments.
Second, if you're determined to buy stocks now, only buy a portion of what you'd like to own. That way, you can be involved in a stock and if it does well right away, you'll participate in the upward move. However, if the stock gets caught in a downdraft, you'll be able to buy more stock for the same money at lower prices. Besides, to buy all of a position at one price suggests you know where the bottom is for the stock. There's a good chance, no let me say an absolute certainty, that you won't buy any stock at the very lowest price. So keep some powder dry and buy a little at a time, on the way down.
Third, continue to stay abreast of news on your stocks. If there is no news on a stock and it keeps going lower, it's probably one of two things: an institutional seller is getting out and is driving the price down until buyers can be found, or there is some bad news coming that isn't fully disseminated. If you keep up on your stocks, you'll have the comfort of knowing that your company is doing fine if they continue to report good news. There is no way of knowing whether your stock is down because of imminent bad news until the news comes out. But once it does, you can determine if it's so bad that your stock deserves selling, or it may be an overreaction to the news and present you with an opportunity to buy more at a great price. In any event, the knowledge you have about a company is the ultimate balm for any wounds the market may inflict. Sometimes stocks go down simply because there are more sellers than buyers (in fact always), but sometimes for no other reason that one seller is much larger than all the buyers. Once that seller is done, the stock may bounce back to its previous levels.
Fourth, keep the bigger picture in mind. These difficult days will pass. Trying to trade in and out of stocks during volatility will only raise your commissions paid and lower your net worth. If you own a great stock, keep it and ride the waves. One friend recently told me his father owned Exxon for 45 years and had 6,000 shares of it when he died. That's a commitment to a stock that paid the investor many, many times his original investment. You never get to experience that kind of joy unless you hang on through the tough times.
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