If you invest in stocks, you may have had a bumpy ride over the past year or so. In fact, the numbers haven't been real pretty. Let's take a look at them:
- The Dow Jones Industrial Average dropped 6.2 percent in 2000, followed by a 7.1 percent decline in 2001. As of the end of the third quarter in 2002, the Dow had fallen 24 percent year-to-date.
- The Standard & Poor's 500 Index fell 10.1 percent in 2000, then dropped another 13.04 percent in 2001. As of the end of the third quarter in 2002, the S&P 500 was down 29 percent year-to-date.
- The Nasdaq Index, containing many technology stocks, lost 39.3 percent in 2000, only to fall another 21.1 percent in 2001. As of the end of the third quarter in 2002, the NASDAQ was down 40 percent year-to-date.
How should you respond to this type of volatility? To achieve your long-term goals, such as a comfortable retirement, you'll need your money to grow. And stocks have historically grown far more than any other type of financial asset.
Instead of dropping out of the investment world, consider taking the following steps to manage volatility:
Give Diversification a Chance to Succeed
Diversification is essential to investment success, but it is not a "get-rich-quick" strategy. In a well-diversified portfolio, some of your holdings will be going up; at the same time, others may be going down. This may not lead to sustained periods of tremendous growth, but, over time, you will be better protected from downturns that affect just one area - and you'll give yourself a wider range of opportunities for success.
Don't Overreact to Temporary Setbacks
Different sectors go through periods of ups and downs. For example, the current market environment has been difficult, in general, for technology stocks and even for some typically solid blue-chips. Should you sell your holdings in these areas? Before you do, remember the first rule of investing: Buy low and sell high. If your stocks are way down, think twice before you sell them and take a big loss. High-quality companies still have bright futures, and they're still likely to reward patient investors. "Blue chips" didn't get that designation for nothing. These are stocks with long histories of steady earnings; they've bounced back before, and they're likely to do it again.
Seek Good Companies at Attractive Prices
Try to find those companies whose management is strong and whose products are well-positioned for the future. Also, look for companies that are reasonably priced as measured by their price-to-earnings ratio and other factors. Remember, the higher a company's P/E, the more you are paying for its expected growth and the greater the downside potential.
Look For Buying Opportunities
Most people think it's pretty good news when the market keeps going up. After all, their share prices are rising and their monthly statements keep looking better. If you're a bargain-hunter, however, a long bull market presents some serious challenges. Why? Because you'll have a hard time finding "good buys," quality stocks selling for low prices. That's not the case, though, if the market is down. When that happens, you can find good stocks at attractive prices. Look beyond their temporarily depressed price and examine their fundamentals, their management, their products and their prospects. If all the signs look good, you might have an excellent buying opportunity.
By following these suggestions, you won't eliminate volatility but you may be able to take a lot of the sting out of it.
