Washington's long-awaited rescue plan appears to be dead for now. If you want to guarantee your own financial security, you're going to have to bail yourself out.
Investors have felt powerless to do much in the wake of the financial mess we've been slogging through over the past year. The good news, though, is that there are several things you can do to shore up your finances. Rather than giving up and accepting a gruesome financial future, implement your own financial rescue plan. Even if you don't immediately see dollars flowing back into your portfolio, the boost to your confidence will help keep you on the road to long-term success.
1. Lower your expectations.
The recent troubles have emphasized the risk part of the risk-reward equation of investing. Stocks earned nearly 13% annually from the beginning of 2003 to the end of 2007, making some believe such returns were sustainable indefinitely.
Yet even the long-term historical average return of 10% may well be out of reach for the near future. Consider how Microsoft
2. Don't kneejerk.
With up-to-the-minute news flashes and one-click brokerage trades, it's tempting to think that a quick decision is the best one. Indeed, this sometimes works: If you owned Research In Motion
Yet often, early morning panic turns to late-afternoon relief, making opening prices some of the worst of the day. Consider the way some shares reacted on Sept. 18, when the entire market recovered from multi-year lows to post a big gain:
|
Stock |
Opening Price |
Closing Price |
|---|---|---|
|
First Solar |
214.50 |
223.39 |
|
NVIDIA |
10.12 |
10.89 |
|
NYSE Euronext |
38.38 |
41.00 |
Source: Yahoo! Finance.
Those who shot from the hip ended up doing worse than those who were a bit more patient that day.
Whatever direction prices are moving, trying to trade at the open is always a bit of a gamble. Order imbalances and other challenges in getting trading started often lead to wild price swings. It's often better to wait until the dust settles a bit before taking action.
3. Look abroad.
International stocks, which delivered outpaced returns for years, have been on the skids lately. Yet if other countries respond to U.S. troubles by developing and relying more on their own financial systems, their capital markets could finally decouple from that of the U.S., providing more diversification.
4. Demand transparency.
More than anything else, financial stocks got into trouble because they became incomprehensible, even to experts. When times were good, people happily bought high-yielding investments without understanding the slightest bit about how they actually worked. Now, they've gotten a rude awakening.
If you don't understand how a business makes money, don't buy its stock. Find one you do understand. Buying what you know helps make you less uncertain about your portfolio and its long-term prospects.
5. Have an egg basket.
Whether it's technology in the late 1990s or financial stocks before the housing bubble burst, there will always be some sector of the market that looks most attractive. Just as inevitably, though, those hot sectors will eventually fall out of favor. Keeping a diversified portfolio is the best way to ensure that you never have everything riding on whether or not a promising market trend continues.
The government plan may not rescue your finances, but you can. By knowing more about your investments, you'll make smarter decisions and avoid some of the mistakes that got us into this mess.
More on rescuing your money:
- Warren Buffett's deal with Goldman.
- Will Generation X ever be able to retire?
- Fixing a crisis we didn't create.
