April 3, 2007
It doesn't seem like investing should be all that hard. Save some money, find a decent investment, and then take a nice long coffee break and let your money do the heavy lifting until you're rich. But just because investing doesn't take a lot of grunt work doesn't mean it's simple. In fact, the real challenge in investing is keeping yourself from getting distracted by day-to-day events that aren't really important in the long run.
Perhaps the hardest thing investors have to learn is how to weather market downturns. The ever-present threat of market crashes keeps some people awake at night. Seniors who still remember the Great Depression cling to their insured bank CDs, having vowed not to get burned twice by the whims of stock prices. Younger investors who've struggled for every penny they put in their accounts can't stomach the idea of half of it disappearing in a matter of days. Yet by reacting to their fear by avoiding stocks entirely, they often leave themselves ill-prepared for dire consequences that are much more likely to occur.
There are many reasons why you shouldn't lose sleep over the next market crash:
- It won't be as bad as you think. If you're just getting started with investing, your savings probably don't amount to a whole lot. Compared with how much you'll be putting aside for retirement and other long-term goals over the coming years, what you have now isn't all that significant. Consider: If you have $10,000 right now and add an extra $200 to your investments each month over the next 30 years, even a major 50% drop will only hurt your final balance by about 11%.
- You have the right stocks. Just because the market is crashing doesn't mean that the price of every single stock falls. After a big drop, the stocks you hear most about are those that drop the furthest, such as Cisco (Nasdaq: CSCO ) and Intel (Nasdaq: INTC ) after the tech bubble. In many cases, however, there are stocks that manage to avoid much of the damage or even rise in the face of broad market declines. For example, companies like Caterpillar (NYSE: CAT ) and SYSCO (NYSE: SYY ) performed well even while most other stocks were falling sharply. And while some market drops affect nearly every company, there are always some stocks that don't fall nearly as far as others.
- You have the right asset allocation. I'm not suggesting that everyone should be 100% invested only in stocks. But leaving out stocks entirely is an even bigger mistake for most investors. Depending on how much money you have, your particular financial needs, and your willingness to take risk, your investment portfolio should probably have at least some exposure to equities.
So if you're nervous about when the next zigzag in the market will make your account balances go down, have confidence in your financial plan and its ability to weather the next crash successfully. If, on the other hand, you don't have a financial plan yet, now's the right time to get started. Foolish finance experts Shannon Zimmerman and Dayana Yochim put together helpful hints for worried investors every month in their Motley Fool Green Light personal finance newsletter. With them on your team, you can count on having someone to celebrate with as you achieve your goals, as well as a shoulder to lean on through the inevitable pitfalls along the way. You're the best person to manage your money, and the Motley Fool Green Light team will show you how to get there. Start your financial plan today with a free, no-obligation trial membership.
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Intel is a Motley Fool Inside Value recommendation and SYSCO is recommended in Income Investor. Take a risk-free look at any of our newsletters for 30 days.
Fool contributor Dan Caplinger will never forget his first crash, but the ones since then haven't been as bad. He doesn't own shares of the companies mentioned in this article. The Fool's disclosure policy won't crash on you.