Recent stock market volatility over the last few weeks and months was really started by the nearly 1,000-point “flash crash” in early May.
The European crisis is a concern, but investors had been looking for an excuse to sell.
The oil spill in the Gulf of Mexico certainly has further worried investors.
But it was uncertainty that always has and always will be the biggest foe of a bull market.
The market’s volatility has understandably made many investors wonder if they are in the right asset classes to ride out the storm.
I’d be lying if I said the last few years hadn’t been difficult, but my game plan has helped me limit my losses. Important lessons are often learned during these market struggles. The past five years have brought a gain of about 5 percent in my portfolio, but the last three months have brought an identical loss.
The biggest changes I have made to my portfolio in the past few years are raising cash and money market accounts and lowering my stake in equities. I still believe that stocks are the way to go in the long run to receive the highest rate of return, but with such an uncertain economic time, I have been largely on the sidelines.
Approximately 33 percent of my total personal financial portfolio is currently in either stocks or mutual funds. Individual stocks currently account for $10,000 of the approximately $20,000 I have invested in the stock market. The other half of the money is currently invested in some strong-balanced mutual funds, and about $2,000 is in an IRA account I started a few years ago.
My exposure to the bond market is minuscule at this point, with a couple of the mutual funds in my portfolio both giving me only a minor stake. At current yields, I simply don’t find bonds a very attractive investment option.
About $40,000 of my personal finances are placed in either a short-term money market account or a certificate of deposit. I am a firm believer in continuing to invest money in these types of deposit accounts even when the yields are quite low. I simply don’t see the benefit of keeping money under the pillow when you could be earning 1.5 percent or more on that money. My best investment was probably the long-term certificate of deposit, currently earning 3 percent, that I took out a few years ago.
I’m young. So I certainly see myself increasing my exposure to the stock market, which I do believe will be much higher 10 years from now than it is today. My long-term goal is for my portfolio to perform better than the S&P 500. I’m also building a nice savings for when I have children and eventually for when those children head to college. I plan to continue my frugal spending and cut costs wherever possible, even as the economy improves.
My advice? Learn from your mistakes and prepare for tough times. The market will improve and the financial talking heads will once again turn ultra-bullish.