You work hard for your money in a tough, competitive business climate. Whether your retirement nest egg is a thousand dollars or a hundred thousand or more, it’s never been more important to protect it from the potholes that line the road to financial security.
The roller-coaster economy, skyrocketing costs for inputs, and the uncertain effects of the economy in general all threaten to eat away at the safety net provided by the money you’ve been able to put aside for your future.
Here are seven steps you can take now to protect that money from the threats posed by a volatile economy:
1. Don’t Panic
If you’re like most Americans, you have some investments in the stock market. Whether they are in a retirement program such as a 401(k) or IRA or in a regular brokerage account, it’s important to stay the course.
“Fluctuations in the market are a natural part of our economic cycle,” says Stacy Francis, Certified Financial Planner and founder of Francis Financial, New York, NY. “When the market is in a downturn it may seem logical to cash out and go home, but before you do that you may want to think about your long-term goals for that money.”
2. Avoid Reacting to Daily Economic Reports
“In an effort to sell newspapers and air time, the media trains investors to look out for the next economic number of the day,” says Jordan Kimmel, with Magnet Investment Group, Randolph, NJ. “Whether its employment numbers, capacity utilization, or inflation statistics, there is always a number of the day to tempt investors into overreacting. In reality, it is nonsensical to react to daily economic reports. No investment strategy is better than identifying superior companies and holding them while letting your money compound over time.”
3. Don’t Turn Off Your Buying During a Downturn
Some of the world’s most successful investors made their fortunes by buying when everyone else was selling. It’s not easy: Investing steadily during market downturns may be too much of a psychological adventure for most of us, but there is a system that enables almost anyone to take advantage of those tempting buying opportunities. It’s called dollar cost averaging.
“Dollar-cost-averaging calls for spending a fixed dollar amount each month or quarter on a specific investment or part of a portfolio, regardless of the ups and downs of the share prices,” says Francis. “By following this pattern consistently, you will purchase more shares when prices are low and fewer shares when prices are high. By making regular and consistent purchases over a longer period of time, your cost basis (the total amount you pay for a security) is spread out. That provides a cushion against normal market price fluctuations.”
4. Don’t Try to Time the Market
“It’s better to invest regularly, without regard for the general condition of the economy or the direction of the stock market,” says Darrell J. Canby, CPA/CFP, President Canby Financial Advisors, Natick, MA.
“Timing the market, trying to determine the best time to buy specific stocks, rarely works,” he says. “You might get lucky once in a while, but your luck isn’t likely to last.”
5. Maintain an Appropriate Asset Allocation
If there is one point that virtually all financial advisors agree on, it’s the critical need for you to maintain an asset allocation suitable to your personal circumstances. Asset allocation refers to the process of dividing your investable assets among stocks, bonds, and cash.
The diversification mix that is right for you at a given point in your life will depend on such things as your age and your tolerance for risk.
If your retirement is years away, most experts recommend relatively heavy investments in equities, 60% or more of your total portfolio. “However, if your time horizon is less than three years,” says Certified Financial Planner Greg Womack, Edmond, OK, “stay in fixed investments like CD’s, short-term bonds, and money markets.”
For an asset allocation calculator that takes these and other circumstances into consideration, go to: http://bit.ly/1tyM3tz.
6. Do Everything Possible to Minimize Income Taxes
There are two kinds of dollars: taxable dollars and tax-free dollars. Keeping Uncle Sam’s share of your hard-earned money to the legal minimum by maximizing tax-free dollars is a critical part of ensuring a comfortable financial future.
Always be sure to take every allowable deduction at tax time each year. And remember that every dollar invested in your 401(k) or your regular IRA is a tax-deferred dollar. You won’t owe income taxes on those dollars until you begin making withdrawals after retirement, unless you have a Roth IRA.
7. Stay the Course
“Creating a plan such as dollar-cost-averaging and sticking with it under all market conditions is the way to maximize your returns,” says Kimmel. “Human nature makes it difficult for the average investor to stick to an investment strategy unaffected by emotion. Sometimes it’s fear; sometimes it’s pure greed. Either way, allowing emotions to affect your investing decisions is certain to damage your financial future.”
“It’s human nature to chase hot sectors that have already made a significant move,” says Womack. “It’s also natural to panic and sell-out when everyone else is doing the same.”
While it may be the natural thing to do, it’s not the smart thing, according to Womack. “It’s important to have an investment strategy and stick to it. Remember, if the headlines are full of it and everyone else is doing it, you’re probably too late.”
There is, of course, much more to the maintenance of your personal finances and keeping them well suited to promoting a good night’s sleep during scary investment times. However, sticking with these common sense fundamentals will go a long way toward protecting the nest egg that is so important to your future.
Editor’s Note: William J. Lynott is a freelance writer who specializes in business management as well as personal and business finance.