Much of the long-term gains that investors will reap down the road when the global economy has healed were sown in the market volatility of the last two years (and the next two years).
It’s been a rough road in the stock market. The investors with a long-term time horizon that have faithfully saved and invested in stocks and bonds will be much better off down the road.
Diversification is the key to successfully navigating these rough seas. One needs a well thought out asset allocation and quality components to populate it. Don’t underestimate the emotional side of the balance sheet: discipline, courage and fortitude are key components of investing success.
The keys to taking advantage of market volatility are:
1. Design an asset allocation that will meet your long-term needs. Consolidate and simplify your accounts. Round up stray 401ks and put them to work for you.
2. Populate this allocation with quality components. I really like index funds as core holdings. Avoid concentrated positions in individual stocks. Enron, Citigroup, General Motors and British Petroleum were all the bluest of blue chips until they fell through their respective cracks.
3. Maintain your mental health and discipline by ignoring the financial media. Look at your account periodically (quarterly) but not daily. Don’t watch CNBC or Kramer because they destroy your long-term perspective. In the grand scheme of things, it doesn’t matter that the Dow Jones Industrial Average closed at 9712 on September 30, 2009. It was big news on that day but it’s not very important to me now. Life, and the global economy, are cyclical and they both move on.