Don't panic, and stick to your sensible investment plan

The Savage Truth

The stock market is just plain scary these days. What should you do when market gyrations make headlines? The simple answer is: Do nothing! Never make investment decisions based on emotion. And the two most dangerous emotions are running rampant right now: fear and greed. The only way to overcome them is to have a sensible investment plan -- and stick to it.

That's the kind of discipline that comes from experience. And experience is an expensive teacher. So if you can't do it on your own, this is the time you'll appreciate having a financial adviser. There are three key ingredients involved in disciplined investing:

Perspective

All historical context seems to fly out the window when markets go wild. You're influenced not only by emotion but by your recent investment experiences. Right now, those experiences are in conflict. You remember the three years in a row of double-digit gains in 2012, 2013 and 2014. (Last year was basically flat.) But you also remember the market crash of 2008-09, which literally cut market averages almost in half, wiping out your previous gains. And now you search frantically for a clue as to whether this is just a temporary decline or the beginning of another bear market.

Facts

According to Morningstar's Ibbotson market historians, there has never been a 20-year period, going back to 1926, when you would have lost money in a diversified portfolio of large-company American stocks, with dividends reinvested. Even adjusted for inflation. For those with at least a 20-year time horizon, that argues for keeping a portion of your money invested in stocks and continuing to buy more on a regular basis. That "diversified portfolio" is what you'll get in your retirement plan's S&P 500 stock index fund.

Self-awareness

If you have time on your side, then history says regular investments -- especially during periods when the market is in decline -- will produce long-term results. A fixed dollar amount invested monthly will buy more shares of that fund when prices are lower. You get the benefit when markets rebound eventually.

But what happens when you're getting closer to retirement. Your time horizon for living is likely at least 20 years beyond retirement. But you won't have the advantage of buying more shares in declines. That's when your strategy gets more balanced. And as you reach the age of 70 1/2, with required minimum withdrawals from your IRA, you'll need liquidity so you aren't forced to sell to make those withdrawals. Suddenly, "chicken money" in money market funds and bank CDs looks more attractive, even with almost nonexistent interest rates.

The important thing is to deal with these issues when the market is calm, not when it is making headlines. During wild gyrations, the best advice is to sit tight. In a declining market, margin calls on other, more leveraged stock owners can cause extreme downdrafts. You want to stay out of the way.

And then again, maybe you don't. If you're both aggressive and disciplined, these market declines could be a windfall for your portfolio.

Peter Gottlieb, president of North Star Investment Management inChicago, has another way to approach big market declines like the current one. He reminds his sophisticated clients about stocks they wanted to buy at higher prices -- companies like Facebook or Netflixor Starbucks. While it didn't make sense to chase them on the way up, Gottlieb suggests making a shopping list at prices significantly below the current market and then entering limit orders to buy. Gottlieb says: "It's a disciplined way to buy bargains, without being paralyzed by fear. You can turn market volatility to your advantage."

Whatever your plan, it's important to plan in advance. Otherwise, you're caught in the frenzy. Fear and greed always move markets. But they shouldn't move you out of your well-planned investment strategy. That's The Savage Truth.

Terry Savage is a registered investment adviser and the author of four best-selling books, including "The Savage Truth on Money." Terry responds to questions on her blog at TerrySavage.com.

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