Bitten by the bear one too many times and uncertain about their jobs and the economy, investors have avoided stocks even after the market's rapid ascent. Indeed, the strong rebound over the past 10 months makes many sidelined buyers only more afraid to get on board, and the recent sell-off likely exacerbated those fears.
Their mantra: We won't get fooled again.
Uncertainty, mistrust, cynicism -- these are what we feel when we feel taken. And investors are right to be suspicious. "This time it's different" was Wall Street's mantra in a bull market that had lost its compass and, later, during a housing market flush with cheap credit. Nothing was different, of course. The booms ended badly, and many investors are still paying a high price.
This time, you can be different. The 1990s market is gone, along with its wild double-digit yearly gains. So plan how to make your money last into your 90s. Act decisively, learn about financial matters, and put knowledge into practice. Stocks will take another hard tumble -- or maybe bonds will be next. If you're certain of where you stand, you'll have little to fear.
There are many ways to get your retirement back on track and put your financial future into perspective.
Here are three smart, simple steps to start:
1. Dollar-cost-average into your asset allocationWhich is more influential to investment returns: individual stock and bond selection or how much money you invest in a broad category? Studies show that asset allocation -- the percentage of your portfolio committed to stocks, bonds, cash and other holdings -- is far more influential than what you actually own.
Although you cannot control the performance of a stock, you can set your asset allocation according to your risk tolerance. Some folks don't like scary movies, so they don't watch them. If the 2008 market was too horrible, then don't invest as much in stocks.
A standard rule of thumb is to use 100 minus your age as a ballpark for how much to have in stocks. So if you're 40 years old, put 60% of your portfolio into stocks. If you can't stomach much volatility, invest like a retiree and keep a larger portion in bonds.
For an even smoother ride, use dollar-cost averaging. That means investing a set amount on a regular basis, purchasing more shares when prices are low and fewer shares when prices are high. This automatic approach takes emotions out of buying and can vastly improve your total return, especially in choppy markets.
Consider the fortunes of an investor who methodically put $500 into theat the close of the first trading day each month beginning on Sept. 2, 2008, and ending on Aug. 3, 2009. At the end of those 12 periods, the $6,000 invested would have been worth $6,578, for a return of 9.6%. The exchange-traded fund, meanwhile, tumbled 21.5%.