Is it time to panic about your nest egg again?
Boomers who lost up to 40 percent of their life savings in the 2008 market crash don't need much to fan a still-smoldering fire of concern, and there's been plenty to worry about lately.
First there are what Wall Street refers to as the PIGS - Portugal, Italy, Greece and Spain, the weakest economies in Europe. Saddled with debts they probably can't pay off, they're being pressured by wealthier neighbors to slash social spending, especially on retirement accounts.
Second, there was that unexplained 1,000-point plunge in the Dow Jones Industrial Average. Although it only lasted a few minutes, the cut was deep and will take time to heal. It would help a lot if anyone knew what happened, and how to prevent it from happening again.
Third, there's the US economy. The good news is that the economy seems to be adding jobs again. The bad news is that a near-record 17 percent of American adults are either jobless or underemployed.
Finally, there's political turmoil in the UK and Germany which are not only two of the top economies in the world, but close US allies on the political front. Changes there could easily affect US policies in places like Afghanistan and Iraq.
Investors hate uncertainty and that is why the market is likely to stay rocky for a while, maybe for another 10-12 months.
Still, for average investors, the old rules apply: Keep a cool head. Plan for the long-term. And buy low, sell high.
A Cool Head
When the market goes south, a lot of smaller investors succumb to run for the hills. It's good to remember that rapid losses are often offset by rapid gains. By selling in a panic, you may sell at a lower price and then have to buy back in at a higher price.
Sitting tight isn't always the right strategy, either. The best course is to carefully consider your tolerance for risk, look at all the facts and consider what the best course is for your personal circumstances.
An independent investment advisor - not one driven by commissions - may be your best friend at that point. Having a dispassionate professional at your side can help you reach a more logical strategy for dealing with volatility and protecting your hard-earned assets.
A Long-term View
Many studies have shown that investors who buy stocks and hold them over the long term do much better than those who buy and sell stocks frequently.
It's extremely hard to out-guess the stock market on a day to day basis because there are a lot of smart people on Wall Street who are competing against you. They have tools and access to information that you don't. And a lot of them lose money anyway.
You can team-up with them by buying mutual funds that are managed by professionals. Sure, there's still risk, but at least there's a professional on Wall Street who is working on your side.
Choosing the right fund - and the right manager - can be tricky, but there are a lot of good tools like the Morningstar guide to help.
So instead of shifting your portfolio nervously on a daily basis, consider putting that energy into finding some mutual funds whose managers you can trust over a longer term.
Buy Low, Sell High
When times get tough, most small investors fall victim to a herd instinct. If everyone else is dumping their stocks, they think they should, too.
The problem is that professional investors have a head start. Smaller investors tend to sell after the big investors are already gone and the prices have already fallen. So mom and pop end up with less when they sell.
When it gets to the point where the market has fallen so much that the folks on Main Street won't go near the market, that's when the professionals move back in, buying up valuable stocks at bargain prices. They know that, eventually, things will calm down and those stocks will rise.
When small investors see prices rising again, they eventually buy back into the market, but they buy in at higher prices. Hence, they get less when they sell, and pay more when they buy.
To be sure, market risks shouldn't be taken lightly. It requires a very strong stomach to invest a nest egg when stocks have just fallen sharply. But that's when the biggest gains can be made.
Just look at the stunning rise of financial stocks over the past year. Would you have bought shares of Citicorp in the darkest days of 2009? Since it hit a low of $2.55, the stock has risen to a 52-week high of $5.43. Of course, once it did, the smart money started moving out of the stock, and it is trading lower now.
Most people wouldn't consider buying into Ford when it was teetering on the edge of ruin and the stock was trading at about $2 a share. Since then, the company has seen a major rebound and the stock peaked at nearly $15. Smaller investors may now feel safer in Ford, and those people who bought it at $2 are probably happy to walk away with a seven-fold profit.
It isn't easy to know what to do as uncertainty fills the market. But it's easy to see that panic won't help. Learning from your mistakes of the past will help you avoid the same errors this time around.
Editors' Note: Like millions of boomers, Tom Murphy holds a variety of stocks and bonds.