The S&P 500 is off to the worst start to a year in history, but instead of hitting the panic button, it may be a better idea to do these three things instead.
No. 1: Gut-check your portfolio
Raising some cash into uncertainty isn't a bad move, but it has to be done right. Rather than wholesaling everything in a portfolio, spend some time considering each holding carefully by asking these questions:
- If I get stuck in a loss on this stock and have to hold it for five years, will it keep me up at night?
- Do the reasons I bought this stock remain unchanged?
- Do I understand the business model of this company?
- Is this company on solid financial footing with plenty of cash (or cash flow) and little debt?
After answering these questions, investors should have a better idea of what names in their portfolios should be tossed and what names should remain in portfolios for the long haul.
No 2: Think about retirement goals
The vast majority of Americans are under-saving for their golden years, and that means many people aren't making the most of their workplace 401(k) plans, 403(b) plans, and traditional and Roth IRAs.
Remember, markets inevitably rise and fall, but over time they've historically gone up, and that means investors with a long time horizon might want to consider contacting their human resources department and boosting the amount of money that gets invested in their 401(k) or 403(b) plan this year.
Even an extra 1% can make a big difference thanks to compounding interest, or the ability for interest earn to earn interest over time. Consider that a person who makes $50,000 annually and increases the contribution by 1% will put an extra $500 in his or her plan annually. If the person is 35, does this for 30 years, and earns a hypothetical 6% annual return, that person will end up with an additional $42,000 in retirement; and that's not chump change.
Similarly, the market sell-off may also be a good opportunity to put money to work in an IRA. If you haven't made your full 2015 contribution yet, consider breaking the remainder up into equal chunks that can be invested monthly until the tax deadline. Doing so will spread out the risk of waiting until April, when it may or may not be a good time to make a lump-sum contribution.
Also, spend a bit of time considering how much to put in IRAs for the 2016 tax year. It may be a good idea to divide that amount by 16 and then invest the amount in installments each month until April 2017. That action will similarly spread out risks associated with trying to pick the "right" time to invest.
No. 3: Think big picture
If some investments don't pass muster, spend some time thinking about companies you'd really love to see in your portfolio. The sell-off could mean that some of the best companies are falling to bargain-bin prices, and if so, then this could be the perfect time to do some upgrading.
For example, more aggressive investors can buy shares in Amazon.com (NASDAQ:AMZN) and Priceline Group (NASDAQ:BKNG) for 9.36% and 9.77% less than they would have paid at the end of December, respectively. Those two companies have been among the market's best performers over time, and each generates enormous cash flow from selling into large and growing markets.
Investors could also consider other companies such as Apple and Celgene Corp. (NASDAQ:CELG). They have retreated 6.5% and 7.7% already this year, respectively, and each of those companies boast arguably bullet-proof balance sheets thanks to top-selling products. Additionally, these two companies are reasonably priced, given that Apple's forward P/E ratio has now slipped below 10 and Celgene Corp.'s forward P/E ratio has fallen beneath 20.
Of course, no one knows when the market will find a bottom and begin rallying again, but investors who attempt to time the market and buy precisely at the low and sell exactly at the high often fall short. Instead, it's investors who plan ahead, rather than react to the market's whims and whispers, that are likely to come out on top.