After days of constant selloffs, a strong stock market performance soothes every investor's nerves. In your overall investing strategy for retirement, however, does one day really make that big of a difference?
Yesterday's 416-point gain in the Dow was the largest one-day jump for the average in five years. Responding positively to the Federal Reserve's decision to offer $200 billion in loans to major Wall Street securities firms such as Goldman Sachs (NYSE: GS ) , Merrill Lynch (NYSE: MER ) , and Bear Stearns (NYSE: BSC ) , markets reversed most of the losses from the previous three trading days.
If yesterday's gains gave you some reassurance about your investments, you're not alone. But to be a successful long-term investor, you have to temper your relief -- and your fear, when the markets fall -- with objective observations of long-term economic prospects, both for the companies you choose as investments and the economy overall.
Seeing the forest for the trees
As entertaining as it is to watch financial television and see every breaking news story as it happens, it's no way to put together a solid plan for your retirement. Market sentiment changes on a dime, and if you try to respond to every shift in the prevailing attitude by making trades, you'll get whipsawed in and out of the market -- often at precisely the wrong time.
If you find that your opinions on stocks go up and down as much as the market indexes have moved lately, take a step back and consider what your best investing strategy is for the long term. For most investors, that involves figuring out how much risk you're willing to take, employing better investing decisions, and then making small adjustments as time passes and circumstances change.
Reacting to real change
On the other hand, deciding not to react to every little news item that shows up on your screen doesn't mean you should ignore your investments entirely. Adjusting your overall investment strategy in response to things that will make a real difference to your portfolio makes a lot of sense.
For instance, if you believe that yesterday's Fed move will finally get the financial system back in working order, then investing in big banks such as Wells Fargo (NYSE: WFC ) or Bank of America (NYSE: BAC ) may be a smart long-term move. But you have to be prepared for the potential for plenty of bad news to come -- news that may send stocks back into a swoon.
Swim with the sharks
It's impossible to know whether stock prices will keep falling from here. But for long-term investors, the question isn't whether it's safe to invest in stocks right now. Stocks do have risk -- but the actual underlying risks don't change nearly as much as price movements would make you believe.
For retirement investors looking for good value, growth prospects, and protection from threats such as inflation, the stock market is serving up a bargain. So even though the markets will never be risk-free, you should feel confident that no matter what happens to share prices in the immediate future, deciding to jump back into stocks now will be a good long-term move for your portfolio.
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