Kiplinger's Finance experts give you a few tips about dealing with market instability.
Tags:What to Do When the Market Drops,diversifying portfolio,effects of dropping stock market,investing in the stock market,Investment tips,kiplinger,low risk investments,saving tips
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Kevin McCormally: I'm Kevin McCormally of Kiplinger’s. I'm here with Manny Schiffres, the Executive Editor of Kiplinger’s Personal Finance Magazine to talk about what to do when the market drops.
Manny, 2007 has been a scary time for investors. There have been 200, 300 and 400 point drops in the Dow on a single day. How are we supposed to react to this?
Manny Schiffres: Well, the most important thing that an investor has to do is not to panic.
Kevin McCormally: What do you mean?
Manny Schiffres: Well, no one knows what the market is going to do on a short-term basis, so these drops are a great opportunity for the typical investor to revisit his portfolio or her portfolio, look at your risk tolerance and determine whether you are investing the way you want to be investing.
Kevin McCormally: And so, it you did lose sleep, if you got sick to your heart when the market dropped, what should you do?
Manny Schiffres: Well, if you have lost sleep because the market went down 300 points a day and it caused you 3% of your overall investments, then you have to tone down the risk of your portfolio. That means cutting back on your stock allocation and putting some of that money to bonds or money market funds.
Kevin McCormally: And I know some smart people say that when the market drops like that, that’s a perfect opportunity to go in and buy because you can buy today for far less than you could have bought it yesterday.
Manny Schiffres: If you’re a short-term investor, it’s really impossible to make a decision one way or the other. Let’s have a couple of examples. The market crashed in October of 1987 and lost 22% a single day. What happened, it meandered for a couple of months and then the bull market resumed in December of 1987. But look what happened in 9/11. After that terrible tragedy, markets went down and they continued to go down for another year. It didn’t help that the 9/11 occurred in the middle of recession. That exacerbated that.
Kevin McCormally: Manny, when you look back at history, what do you suggest for people going forward? What should investors do for the rest of this year?
Manny Schiffres: Investors need to look at their portfolio, assess their personal tolerance for some volatility, and assess their long-term—assess their time horizon. If they’re investing for the long haul, they should be primarily in stocks if they have the stomach for it.