Remember when you were a kid and you got a bad bite from a bug? It itched like crazy, but your mom told you not to scratch it. Sure enough, if you scratched, the bite area got worse -- but if you left it alone, it eventually got better.
The stock market has given nearly all of us a bad bug bite in our portfolios. You probably want to scratch yours -- by selling your losers. But if you have a good financial plan to keep you from making that mistake, your portfolio will get better in the long run.
A nasty bugger of a market
This bear market has taken no prisoners. Financial stocks picked themselves up off the mat after an eight-count last week, but their problems may just be beginning. Everyday stocks like Dow components Coca-Cola (NYSE:KO) and Boeing (NYSE:BA) are down substantially so far in 2008. And lately, even some strong-performing sectors have pulled back. U.S. Steel (NYSE:X) has lost more than a quarter of its value in the past month. Even energy stocks are showing some signs of weakness:
|
Stock |
YTD Return |
|---|---|
|
ExxonMobil (NYSE:XOM) |
(12.2%) |
|
ConocoPhillips (NYSE:COP) |
(3.2%) |
|
BP (NYSE:BP) |
(12.7%) |
|
Frontier Oil (NYSE:FTO) |
(54.8%) |
Source: Morningstar. Through July 18.
With the last of the recession-resistant sectors finally showing signs of weakness, is it time to change your investing strategy and dump all of your stocks before you lose any more money?
My answer is no. As long as your investing plan makes sense for you, then you should stick with it.
Stand pat, win or lose
It's tough to do nothing while your portfolio loses value every day. You see your financial dreams start to disappear. No matter how much time you've spent putting together a good strategy for investing your savings, losses make you just want to chuck it all in the garbage and hide your greenbacks under your mattress.
Part of the reason behind your panic is that you don't typically hear much about the risk of investing in stocks. Historically, stocks have been the place to be if you want to grow your money as much as possible. But you may gloss over the fact that those historical returns came with quite a bit of volatility -- including plenty of periods when investors had to endure substantial losses.
The worst time to quit
Although most investing plans take a long-term view, you may not be able to stop yourself from looking at short-term results that can distract you from the overall plan. Unfortunately, the methods that financial professionals often use only encourage this sort of thinking. By using nice, smooth hypothetical illustrations that show steady growth throughout your lifetime, they completely ignore the certainty that you'll have a much bumpier ride in reality. That leaves you unprepared for the reality of stock investing.
Better financial plans focus not just on the returns you hope to achieve but also the amount of risk you'll be comfortable taking along the way. For instance, if you ask someone how high they'd like the returns on their investments to be, you're much more likely to end up with an aggressive portfolio concentrated almost entirely in stocks. But if you ask how much of his or her portfolio that same person would be comfortable losing over a few months or years, the answer you get will often push you toward more conservative investments.
Hang tough
If you have a financial plan that addresses not only the potential rewards of stock investing but also the risks involved, then you should hold onto it -- and follow it, even if you've suffered losses recently. Bear in mind that many past investors who earned double-digit percentage returns from stocks had to endure bear markets that were even worse than what we've seen thus far.
On the other hand, if you can see that your investing plan hasn't taken all the risks involved into account, then you may need some help. You can find that help right here at The Motley Fool. Robert Brokamp, the Fool's resident expert on helping people do long-term planning for their retirement, has developed a tailored approach for his Rule Your Retirement newsletter service that comes complete with model asset allocations and suggested investments.
So take a look at your investing plan and how it's working. If you see real flaws, then it's definitely worth looking to see how you can improve it. But if you have a good plan, don't let short-term losses coax you away from the straight and narrow. Leave those bites alone, and you'll end up exactly where you want to be.
To learn more about financial planning, read about:
- What you can learn from one investor's stupidity.
- Why now is the time to invest.
- Which retirement mistake you can't afford to make.
