As the stock market continues to careen to new heights, many investors worry what will happen when the inevitable market correction occurs.
For retirees, who have less time to recover from a significant downturn than younger investors, market fluctuations can be particularly nerve-wracking. Now more than ever, it is important for older people to adhere to some basic rules of investing: Don't panic, keep a long-term view, and diversify your investments.Since the beginning of 1995, the stock market, as measured by the Dow Jones Industrial Average that tracks the performance of 30 actively traded blue chip stocks, has been on an upward trend, reaching new highs on a fairly consistent basis.
Some financial analysts even predict that the Dow, already well over 6,000 points, may breach the 10,000 mark by the year 2000.
But market volatility is a fact of life. And while the Dow has continued to reach new highs, there have also been a record number of days this year when the Dow has been up or down 50 points from the previous day's close.
Despite these wild swings, volatility in the stock market is not as dramatic as you may think.
A study by Ibbotson Associates Inc. of the Standard & Poor 500-stock index of predominately larger company stocks shows that the past five years have been less volatile and more rewarding than the preceding five years.
One misleading aspect of the large point swings in the Dow these days is that what once was a considered a major move - say 50 or 100 points - means less today because it represents a smaller fraction of the overall value of the market.
Meanwhile, bonds, the traditional haven for retirement investments since they provide steady income, may be more volatile than you think. In fact, 1994 was the worst year ever for bonds, while 1995 was the third best.
If you have any investments in the financial markets, keep these guidelines in mind during the roller-coaster days that may lie ahead.
- Don't panic. That's easier said than done when the market is in a free fall. But it's especially important for older investors since they have less time to recover from losses. Rather than trying to time the market and sell declining stocks at a loss, you are almost always better riding it out.
A dramatic illustration was the aftermath of the crash of October 1987. Though the market dropped an unprecedented 508 points in a day - one of the worst days in stock market history - it also rebounded over time, always gaining new and higher ground.
- Think long-term. Keep your eyes on the horizon, not on today's market report. The average person lives 20 years or more after retiring, and will most likely see several major market fluctuations during that time.