Livin on a Prayer
In a recent song Bon Jovi sing that 'the market keeps on crashin and tattered jeans are back in fashion' and so to it would seem is it fashionable again to try and time the market.
Nobody likes volatility, it makes everyone uncomfortable but the question is what do you do about it? Well you essentially have two options.
Firstly you can make it go away by cashing out and sitting on the sidelines or alternatively you can make it go away by just ignoring it and sticking to your strategy. One is an emotional approach and the second is an analytical approach so lets consider which is the better decision for your long term future.
Cashing Out - The Emotional Decision
Quick, easy and painless (at least initially) cashing out eliminates the volatility almost instantaneously and allows you to sit on the sidelines, generate a modest return from cash or a fixed interest investment and wait until 'it all settles down'......and there is the catch. What does settle down mean?, what does it look like?, how do you know when it has settled down and what is your strategy for getting back in?. We often tell clients getting out is the easy part, getting back is almost impossible as you don't know when things have settled down until you can see it which is well and truly after the fact.
This essentially comes back to the age old problem of timing the market. To do this you need to be lucky not once, but twice as you need to not only pick the right time to get in (or out) but also the right time to get out (or back in again) which is nigh on impossible to do once let alone twice!
Sticking with your plan - The Analytical Decision
Having a plan is the first step (if you don't have one please go and get one and then come back to finish this article) and sticking to it is of critical importance. As part of any long term financial plan you will have assets allocated according to their requirements over the short term (anywhere from 1-5 years) and the long term (5 years plus).