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This is the last in a series of 5 lessons recalled from the recent market correction. Occasionally portfolios should be checked daily not weekly or monthly and you may need to act with diligence. When there is extreme volatility in the markets with higher than normal trading volume it can signal a call to act. The time to educate yourself is before the volatility not after it begins in order to have the knowledge required to act with confidence regardless of what commentators on TV or your friends are saying.
What knowledge is helpful in reaching such a decision? A major factor in deciding whether to get out of a declining market early on is the length of time until which you will need access to your money. If it goes down further can you wait it out or will you need the money before then? As we discuss in our Investing 101 class the longer the time until you need the money the more volatility an investment can take. Notice I say “early on”; it doesn’t make sense to get out after most of the decline has already occurred. Another consideration is the current valuation of the underlying securities. If the values are still high relative to the historical norms maybe it makes sense to reduce at least some of your holdings in the overvalued market. If you wish to get more actively involved in your portfolio management there are some simple technical indicators such as moving averages that can be used to help identify market tops and bottoms. A basic knowledge of these indicators can provide additional support for your decision as to whether it makes sense to act or remain further exposed to a market downturn.
The bottom line is to be prepared to give extra attention to your investments when necessary. Be prepared to act when you decide it is wise to do so. Educate yourself and establish a discipline of paying attention.