Articles: Riding out market ups and downs
The last few years have certainly been bumpy for most investors. The equities markets have gone up, down and even sideways. If you are investing for the long term, you must learn to deal with the vagaries and position yourself accordingly in 2012. Usually, it’s not a good idea to exhibit knee-jerk reactions based on daily market fluctuations. That can make a bad situation worse or fail to maximize benefits in a good situation.
In particular, you might avoid several common mistakes that seem to plague many investors. Here are five prime exam ples.
Mistake 1: You misunderstand the use of bonds. Some investors equate bonds with complete safety. But that is not exactly true. As we have seen with the recent rating downgrade by Standard & Poor’s, even U.S. Treasury bonds pos sess some risks. Other bonds, “junk bonds,” may provide a significantly higher yield than Treasuries but carry a much higher risk of default.
Of course, there is a place for bonds within a well-diversified portfolio. You just do not want to overload on bonds or blind ly chase after yield. Find the proper balance to match your investment objectives and risk tolerance.
Mistake 2: You think you are diversified enough but you are not. If you have spread your investments over a half-dozen offerings you still may be “under-diversified.” In particular, look to diversify within different classes of investments. For instance, if you have invested solely in stocks or in bonds, you should probably adjust your portfolio. Also, in today’s economic environment, do not ignore diversification available through international investments or gold. Just be aware of the special risks associated with these investments.
Mistake 3: You sell too soon or too late. Timing the sale of securities is a tricky proposition. Sell too early and you may miss a run-up in value. Sell too late and you may magnify the loss instead of minimizing the damage.
Best approach: Seek professional guidance. Note that you can cap losses on securities sales by implementing a stop-loss order. This instructs the broker to automatically sell securities once they fall below a specified price.
Mistake 4: You buy too soon or too late. If you are too anxious to jump on a “hot” offering, you could end up losing money. Carefully analyze your investment decisions and act accordingly. On the flip side, you might be guilty of procrastinating. This could result in missed opportunities for gains and chances to reduce or avoid losses. Once you have reached a well-reasoned decision, try to abide by it.
Mistake 5: You frequently act on a whim. When the market slumps, investors may have little clue what to do next if they do not have a written plan in place. Similarly, they may not be able to capitalize when the market is booming. Suggestion: List your investment preferences and outline the boundaries for your portfolio. This includes a description of the exposure you feel you can tolerate. Finally monitor the plan during the course of the year.
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