January 2009

Weathering Market Changes


With current market turmoil, many people have seen a reduction in their retirement accounts and investment portfolios. It’s no question that people get emotional when it comes to their money. But rash decisions often lead people to make portfolio changes that may have adverse effects on their growth potential. Instead, investors should replace emotion with a disciplined strategy. The key to investing for the long term is consistency in all market types.

There are simple ways to withstand a tough market. When times are bad, your first instinct might be to take your money out of the market and deal with the losses. And others might make conservative investments that will stifle growth potential. You must be a consistent investor and spread the risk, no matter what the market is doing.

The most important thing is to understand your short-term and long-term goals. Once you know what you want to accomplish, there are four basic steps you can take to help safeguard your financial well-being through good times and bad.

1. Plan. To reach your financial goals, you have to know first where you’re going. For example, if you’re investing for retirement, you need to determine when you want to retire, how much you will need to live on in retirement, how much time your investments have to grow, and how much you can afford to save each year. Once you’ve answered these questions, you or your financial professional can develop the investment strategy that will help take you where you want to go. For each element of your financial future, you will need to plan. Your plan incorporates many elements, including investments, savings, insurance, and estate planning.

2. Prepare. Make sure that all your emergency needs are covered – including adequate life insurance and saving enough in a rainy day fund to tide you over during an unexpected run of bad luck. Once your emergency needs are covered, you can begin putting your savings to work in a long-term investment strategy.

3. Diversify. Even if you’re an aggressive investor, it’s never a good idea to put all your eggs in one basket. Those who most successfully weather the market’s ups and downs are those who have a variety of investments – some fixed income securities along with a diversified stock portfolio that includes small and large cap, growth and value sectors.

Asset allocation – the process of deciding which stock and bond sectors you want in your portfolio and what percentage of each—is important for two reasons. First, by spreading your bets among different types of stocks and bonds you are more likely to protect your assets on the downside – that is, when the market is falling. Second, since no one can predict what next year’s winners will be, having a piece of many types of securities makes it more likely that you will pick some winners.

Your own asset allocation will depend on your age, your investment goals, your tolerance for risk, your tax bracket, and other variables. Please be aware, however, that asset allocation does not guarantee a profit or protect against loss. All investments are subject to market risk, will fluctuate and may loose value.

4. Re-evaluate. The most appropriate strategies and asset allocations will only serve you for so long. Life circumstances change: children and grandchildren are born and grow up; your earning power increases; you get closer to retirement; you inherit money, and so forth. As your life changes, you’ll need to re-evaluate your plan to make sure it still meets your changing situation and goals.

You also need to periodically rebalance your portfolio. As the market goes up and down, your portfolio’s allocation will change – a run-up in small cap value stocks, for example, will increase the percentage you own in that sector, putting your portfolio out of balance. When you rebalance, you sell some of your winning sectors and buy more of the sectors that have not yet performed as well—thus conforming to the classic investment advice of “buy low, sell high.” Rebalancing can help prevent your portfolio from taking on more risk than you had originally intended – and help you avoid possible losses when a formerly hot sector starts declining.

Speaking with your financial professional and taking precautions beforehand will help combat an unstable and unpredictable market. Safeguarding your portfolio is more than meeting with your financial professional once of year. It’s planning to send your kids to college, it’s planning for your dream home and it’s planning for a comfortable and enjoyable retirement. Armed with a plan and preparation, you will be well-equipped in good times and in the bad times.

This article is provided by Christopher Tassone. Christopher Tassone offers securities and investment advisory services through AXA Advisors, LLC (member FINRA, SIPC) 10 Hospital Center Common, Suite 200, Hilton Head Island, SC 29926 and offers annuity and insurance products through an insurance brokerage affiliate, AXA Network, LLC and its subsidiaries.

AXA Advisors and AXA Network do not provide legal or tax advice. Please consult your tax or legal advisor regarding your individual situation.

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