I know a lot of you are wondering how you should react to this market. Having no plan is not a plan. Have a plan and have the discipline to work that plan.
First I'd like to divide you into 3 groups: 20-45 year olds, 46 - 65 year olds and the best for last those of you who have already accumulated the portfolio you expect to support you for the rest of your life and legacy.
The group that should not be experiencing any panic, in fact you should be jumping for joy is the 20-45 year old group. Volatile and declining markets are your friends. Study dollar cost averaging and how it works for you in your accumulation phase. I'm going on the assumption you have read 2 great writings: The richest man in Babylon and The Millionaire Next Door. In both these writings we find that those people who had a sound savings and investment plan ended up with the biggest estates in the end.
You should be funding your 401Ks and IRAs to the fullest extend and invest very aggressively. You should have a swing for the fence portfolio. Small and micro caps, emerging markets, stocks that have the next great ideas or fastest growing sales. Hopefully your stocks will grow and eventually turn a profit. You can take calculated chances.
Notice I said calculated. Don't just throw money against the wall to see what sticks. Look for fast growing companies. Many business and investing magazines have annual articles about America's fastest growing companies or the best 10 ideas for the future. Find those opportunities or find quality mutual funds that are known for finding those opportunities for their investors. Time and growth are on your side.
The next group 45 - 65 is a very conflicted group. Most of you are thinking about the impending retirement looming out in the future at the exact same time you children are the most in need of your funds for private school, cars, travel, colleges and weddings. Do you save for yourself or spend on your kids? You must budget and not fore go your retirement contributions.
Your portfolio although still looking for growth should be looking for better stability. Start weighting toward companies that have a high correlation of sales, earnings and price growth persistence. Stop losses should be your friends. Although no one is an expert at market timing stop losses can help protect your profits and buy stops can help you get back in at the right prices.
The last group and the group I'm in are those who have already accumulated the portfolio that will fund the rest of our lives and be the estates we will leave our heirs.
You cannot fore go growth for income. Most 65 year old men will live another 20 years and the woman might live another 25 to 30 years. Invest the way you did when you were in your 40s and 50s but have tighter stop looses and the decision to be in cash in a down market isn't bad.
A balanced portfolio of large, mid, small and micro caps plus real estate, high income securities and gold to protect against recession or inflation are a must. You have years to live and need growth as much as you need income. Your portfolio should be designed to have growth that exceeds both inflation and taxes and that is too hard to accomplish if you are only invested in income securities.
Now is the time to make your own individual plan and use this market as a opportunity to prune out the investments that do not fit your plan and look to acquire those investments that are needed to secure your portfolio.
Most of all don't panic and sit on the side line like a deer in the head lights or dump all your investments like Chicken Little. The sky is not falling and tomorrow will be a brighter day. Be ready with a plan that will allow you to seize the new opportunities that will come your way and at the same time protect what you've already accumulated.
