As an investor, you need to realize that the stock market will always have its ups and downs. You can’t do anything about these fluctuations – but you don’t have to let them wreak havoc on your investment decisions.
Of course, during those occasions when your brokerage statement contains unwelcome results, you may be tempted to take action by selling off some “losers.” But is this a good move? After all, your investments may only be down temporarily. Furthermore, if you decide you must immediately lower your risk level and you replace your stocks with fixed-income vehicles, such as certificates of deposit, you could harm your portfolio diversification, reduce your growth prospects and slow your progress toward important goals, such as a comfortable retirement.
So, what should you do? Here’s a suggestion: Look beyond your investment statements, and seek out the following five pieces of information:
Long-term returns. How have your investments done over the last five or 10 years? The long-term returns will give you a truer – and possibly a more positive – picture of how you are doing. Be aware that a down market can lower the prices of many stocks and stock-based investments. By looking at how your investments have fared over a period of several years, you can get a sense of whether they are just going through a bad spell along with the rest of the market, or if they are, in fact, chronic under-performers.
Total difference in assets from a year ago. If you’ve been investing regularly, your balance today may still be higher than it was a year ago, even if the market is down. That “bottom line” may help encourage you to maintain your long-term perspective and to continue following your investment strategy.
Asset allocation balance. Are you properly diversified? By investing in a wide range of stocks, bonds, government securities and other vehicles, you can increase your chances of success, while reducing the impact of short-term volatility. Ideally, your investment mix should be based on your risk tolerance, time horizon and long-term goals. You may want to work with an investment professional to design an asset allocation plan that’s right for you.
Price/earnings ratio. If the prices of your stocks have dropped, you might want to buy even more shares. Some of the world’s greatest investors, such as Warren Buffet, constantly look for high-quality stocks whose price is temporarily depressed. By doing just a little research, you can find a stock’s price/earnings ratio (P/E). A high P/E indicates a stock’s price is expensive relative to its earnings, while a low P/E may be an indicator that a stock is attractively priced.
Dividends paid. Even if a stock’s price is down, it might continue to pay dividends. And if you reinvest these dividends into the stock, you are adding more shares, which can pay off for you if the stock’s price rises again. (Keep in mind, though, that not all stocks pay dividends, and dividends can be increased, decreased or totally eliminated at any point without notice.)
Your brokerage statement can give you a snapshot of your investments – but snapshots rarely provide depth or context. To be a successful investor, you must look at the big picture.