Three Keys to Surviving Market Turbulence

From the desk of Mark LaSpisa, President and Managing Advisor: Three Keys to Surviving Market Turbulence

All too often, investors react to a sharp drop in prices by panic selling or digging in their heels despite deteriorating fundamentals. But more thoughtful investors see a correction or downturn as an opportunity to review the risks in their portfolios and make adjustments where necessary.

Most stock market investors are looking for the same result: strong and steady gains of their investments. Dealing with a period of sustained falling stock prices is not easy. All too often, investors react to a sharp drop in prices by panic selling or digging in their heels despite deteriorating fundamentals. But more thoughtful investors see a correction or downturn as an opportunity to review the risks in their portfolios and make adjustments when necessary.

Any time you are feeling nervous when confronted with any adverse market event -- whether it is a one day blip, a more lengthy market correction (a decline of between 10% to 20%), or a prolonged bear market (a decline of more than 20%) -- take time to review your portfolio and call your Vermillion Financial Advisor. It will help you in dealing with the difficulties that volatility can bring. Here are three suggestions to help you and your portfolio survive market turbulence.

Talk with your Advisor. Your Vermillion Advisor can help you separate emotionally driven decisions from those based on your goals, time horizon, and risk tolerance. Researchers in the field of behavioral finance have found that emotions often lead investors to read too much into recent events even though those events may not reflect long-term realities. With the aid of your Vermillion Advisor, you can sort through these distinctions, and you'll likely find that if your investment strategy made sense before the crisis, it will still make sense afterward.

Keep a long-term perspective. The only certainty about the stock market is this: it will always experience ups and downs. That's why it's important to keep emotions in check and stay focused on your financial goals. A buy-and-hold strategy -- making an investment and then holding on to it despite short-term market moves -- can help. The opposite of buy-and-hold investing is market timing -- buying and selling investments based on what you think the market will do next. Market timing, as most investment professionals will tell you, is risky. If your predictions are wrong,  you could invest when the market is on its way down or sell when its on it's on its way up. In other words, you risk locking in a loss or missing the market's best days.

Update your Capital Preservation Policy. While it's important to remember that periods of falling prices are a natural part of investing in the stock market, your written capital preservation policy (CPP) is pre-planned action step(s) to be taken when volatility raises above normal levels. Your advisor has a variety of tools to use to address volatility in your portfolio including automatic stop losses, dollar cost averaging, individual stock and stock index options to hedge their portfolios against a sudden drop in the market. Perhaps the best move you can make is reevaluating your risk profile which limits your CPP for taking overall risk.

Three-Step Retirement Plan Tune-Up

Even if your personal outlook hasn't changed, keep in mind that uneven returns provided by different investments may have caused your portfolio to shift from your intended asset allocation.
Conducting an annual review of your retirement goals and strategy is a great way to help ensure that your plans for your financial future remain realistic and on track. With that in mind,  taking the three easy steps outlined below will help you conduct your retirement tune-up.

Step 1: Review your retirement goals
Your first step should be to review your retirement savings goals and assess whether anything significant has occurred during the past year that might affect either your outlook for retirement or your current strategies to prepare for it. For example, have you decided to change the date when you'll retire? Or have you experienced any new milestones such as getting married, divorced, or having a child? Any of these events may affect how much you will want to save to fund the retirement you envision.

Step 2: Take a fresh look at your retirement strategy
Your portfolio's specific mix of stocks, bonds, and cash, known as your asset allocation, should complement your financial goals, risk tolerance, and time horizon. If you haven't taken a fresh look at your investments in awhile, don't assume that your old asset allocation is still appropriate for your current needs. Even if your personal outlook hasn't changed, keep in mind that uneven returns provided by different investments may have caused your portfolio to shift from your intended asset allocation. Given the market volatility that has occurred since 2007, if you have not reviewed your asset allocation since that time, there may be a good chance that uneven returns have caused it to change. If your asset allocation needs to be rebalanced, now may be the time for action.

Step 3: Consider saving more
None of us know what the future might hold. A good way to improve the odds that you have saved enough for retirement is to save more, no matter how prepared you may already be. If you have not already done so, consider funding an IRA. To find funding limits for your IRA account, more information can be obtained at www.irs.gov. If you participate in a workplace-sponsored retirement plan -- such as a 401(k), 403(b), or 457 -- you can contribute up to $16,500 for 2011. Those aged 50 and over can add up to another $5,500. If you are eligible for a plan at work, but haven't enrolled yet, what are you waiting for?

Conducting a retirement tune-up is always a great idea, but don't forget to consult with your financial advisor to discuss what else you can do to help achieve retirement security.