Investors have certainly ridden a roller coaster over the past several years. From its high of 1,565 on Oct. 9, 2007, the S&P 500 plummeted to a low of 677 on March 9, 2009. From that low point, the index closed at 1,328 on April 8, 2011, a gain of 96 percent off of the March 2009 lows.
This wild ride is not unprecedented. From Dec. 31, 1996 to March 24, 2000, the index gained 106 percent to 1,524 only to drop 49 percent to 777 on Oct. 9, 2002 in the wake of 9/11 and other events. The index then rose 101 percent through Oct. 9, 2007.
Here are four things investors should consider in this market:
Review your portfolio. You should monitor your portfolio on a regular basis no matter what the market is doing. This is even more critical on the heels of a major market move such as the one we are currently experiencing. How have your holdings performed compared to their peers? Have you reached sell targets on any stock holdings?
Revisit your financial plan. Investing without a financial plan is like starting out on a trip and not knowing the destination. Much was written about the havoc the recent market downturn wreaked on the financial plans of many, especially those nearing retirement. For those who stayed with their long-term investment strategy, they likely have recovered all or most of what they lost. Take stock of where you are in relation to the accumulation needs of your financial goals. Consider making adjustments in your allocation based upon your progress toward your goals.
Rebalance your portfolio. Rebalancing is not a guarantee that you won't lose money, but it does ensure that you stick to your overall investment allocation. As a simple example, let's look at someone who had invested $10,000 each in two mutual funds, Vanguard Total Stock Market (symbol VTSMX) and Vanguard Total Bond Market (VBMFX) on March 1, 2009. If this investor had held the two funds through March 31, 2011, they would be worth a combined $30,933—or a 55 percent increase over the original $20,000 investment. However, the original 50-50 split would have changed to 63 percent in Vanguard Total Stock Market and 37 percent in Vanguard Total Bond Market. This is based on the relative performance of the two funds over this time period. Leaving this allocation unchecked exposes the investor to more risk than they may be comfortable with. Rebalancing is the ultimate sell discipline for investors who otherwise might not have one.
Seek professional help if you need it. The markets and the economy move fast. It's easy to get caught up in the news of the moment. A qualified, objective financial advisor can assist you with reviewing your investments and your overall financial situation, and provide guidance on a one-time or ongoing basis. Weigh the costs (hard dollar and opportunity) of professional advice against the potential benefits. This should be your guide in making this decision.
While market volatility is not new, the speed at which markets can move keeps increasing. Make sure that you stay on top of your investments and your overall financial situation with regular reviews in this and all market environments.
Roger Wohlner, CFP® is a fee-only financial adviser at Asset Strategy Consultants where he provides advice to individual clients, retirement plan sponsors, foundations, and endowments. He recently cofounded Retirement Fiduciary Advisors to provide direct investment and retirement planning advice to 401(k) plan participants. Follow Roger on Twitter and LinkedIn.