If you’ve been thinking that not much is happening in the market lately, you’re right. Through the first seven months of the year, none of three major stock market indexes has fallen by more than 5 percent. And one gauge of market movement, the CBOE Volatility Index (VIX), which measures investors’ expectation of the ups and downs of the S&P 500 Index over the next month, recently dropped to its lowest level in 24 years.
Yet, risks persist. A terror attack. A bad storm. Turmoil in the American presidency. Any event can unsettle the market and lead to a small or large downturn. Risks, if you remember them, can help you maintain a healthy sense of caution.
The latest contribution to LetsMakeAPlan.org offers the following tips to help investors avoid a false sense of security.
- Have a financial plan: Control your financial destiny by creating a financial game plan with your CFP® professional, which considers your risk tolerance and puts you on track to save enough money to reach your delineated goals.
- Beware the savings trap: Rising asset values in the stock and housing markets can lead investors to gloss over the basics. “In 2006, I met with a then-client whose net worth had jumped because of a combination of a booming stock market and skyrocketing real estate prices,” Schlesinger said. “In his mind, he didn’t have to save more money.” You probably can guess what happened in the ensuing years.
- Rebalance your diversified portfolio: There is no better time to rebalance your portfolio than when stock markets are calm and rising. Additionally, this could be an ideal time to replenish your emergency reserve fund, which is where you set aside enough money to cover six to 12 months of living expenses.
- Stop trying to beat or time the market: Despite evidence that it’s nearly impossible to beat the market consistently over the long term, many investors still delude themselves into thinking they can do so. The same theory goes for those who may also be sitting atop some cash and waiting for the “right” time to put it to work. Who knows when that will be? Although you may invest at the seemingly “wrong” time, putting your money to work brings you one step closer to reaching your goals.
When the volatility returns to the market, you’ll be ready.