By Tom Sightings
Aug. 25 — Liz Ann Sonders, chief investment strategist at Charles Schwab, discusses her message to clients preaching patience over panic when dealing with a market selloff. She speaks on “Bloomberg Markets.”
For over a month we’ve been watching the stock market waffle, waver and weaken, to the point where many of us might be tempted to give up, sell out our mutual funds and stash whatever’s left in a safe, secure and low-paying cash reserve fund, or even a savings account at the bank. But that would be a mistake.
A lot of people make a lot of money from the stock market. A few of them do it overnight. But most investors make their money over a long period of time. Take Warren Buffett, generally considered the most successful investor in America. He’s worth north of $60 billion. But even this financial genius took some ten years to make his first million, and over half a century to make the rest. Do you really think you can make money any faster than the Oracle of Omaha?
For those of us who are saving for retirement, slow and steady beats a wild ride. So here are seven guideposts to help you chart your way through any market:
1. Start saving and investing early. Warren Buffett had a paper route as a child, and in high school he ran a pinball machine business. He started investing in stocks at the age of 11. Now, you probably didn’t start investing at age 11. But there’s no reason you can’t forego a few cafe lattes and start socking away some savings today, or start adding to the 401(k) plan or individual retirement account that you’ve been neglecting for the past few years.
2. Sign up for your employer’s retirement plan. No matter how good or bad your employer’s retirement plan is, it’s better than nothing. So sign up as soon as you’re eligible — or if you haven’t started yet, start now — and try to contribute the maximum amount you’re allowed. If your company does not offer a savings plan, open your own IRA. No excuses.
3. Get somebody to match your contributions. If your company matches your 401(k) deposits, do the smart thing and contribute at least as much as the company match. If the company offers an employee discount for buying company stock, take the deal. It’s better than what everyone else is getting. If anyone else offers to supplement your account — whether it’s your employer, the government or a rich uncle — take them up on it, because it’s the best return on an investment you’re ever likely to get.
4. Reinvest your dividends. When you sign up for a plan, you have a choice to take the dividends and distributions in cash, or to reinvest them. Check the reinvestment box. That way you automatically dollar-cost average into the market, meaning you invest more when the market is down, and less when the market is up. Reinvesting dividends is also a way of compounding investments, so you will make new money on your old money.
5. Do not try to time the market. A library full of academic studies has demonstrated that no one can consistently predict whether the market will go up or down over the next month or two, or year or two. Most of us are just plain wrong. When everything looks rosy, that’s when something goes awry. When the market is down and depressed, that’s when it’s likely to jump higher. What we do know is that history has shown it will probably be higher five years from now, and almost certainly higher ten years from now.
6. Do not give up. There will be times when you get a statement showing that instead of making money for the last quarter, or even the last year, you actually lost money. A lot of us went through this crucible in 2008 and 2009. It could happen again in 2015. But do not despair. Even with the recent downturn, those losses from 2008 and 2009 have been made up, and then some.
7. Wait a long time. Remember, you’re not supposed to use your retirement funds for 10 or 20 or even 30 years. So be patient. Do not worry about short-term swings in your account. And whatever you do, do not raid your retirement fund for daily needs. Do not use that money to take a trip to Europe or buy a new car. The whole idea is to let this money accumulate and grow over time. You may not be able to wait half a century, but then you don’t need $60 billion either.