As stock markets around the world, including ours, continue to rise, investors that pulled their money out of the market last year are beginning to get restless. It’s reported there’s between $3-5 trillion dollars in cash sitting on the sidelines. If you’re someone preparing to invest in the market again, be mindful of the following:
First- If you lost a bundle during the recent crash, you may find yourself tempted to swing for the bleachers and hit a home run with your investments. If this describes you, be mindful that you may be more susceptible to turning a blind eye to the risk you’re taking. Looking to hit a home run may have been the reason you took on to much risk in the first place.
Action: Slow down, focus on your long term financial goals, develop a financial plan and take the least amount of risk possible in order to reach your goals.
Second- Putting it all on red or black. If the stock market continues to rise, bonds and other fixed income investments are going to feel boring and the stock market is going to feel sexy. The temptation of putting everything into the stock market is hard to resist for many investors.
Action: Make sure you have your eggs in a lot of different baskets. Lack of diversification is where many investors get into trouble. www.vanguard.com has an excellent education tab on their website that can teach you the basics of developing a well diversified index fund portfolio. Also, you may want to have a financial planner review your portfolio once a year if you feel it will help you stay on track.
Third- You got so burned in the recent stock market crash, you’ll never invest in the stock market again; never, never, never. I’ve received lots of calls from boomers that feel exactly this way. I totally understand how they feel. Yet that said; anyone deploying this strategy without crunching their numbers first could be shooting themselves right in the foot, cutting off their nose to spite their face…you know what I mean.
Action: Objectively, honestly and without judgment, review your portfolio holdings prior to the crash and see how much exposure you had to the stock market. Most likely, you were holding a portfolio that was way beyond your risk tolerance. Oh well, nothing you can do now about the past except learn from it. Don’t be fooled again. Moving forward, determine what your true risk tolerance level is and invest accordingly. Also, a second opinion would help you feel more confident about your decision.