During periods of dramatic market fluctuation, it is important for investors to avoid emotional responses to investing.
Q: With economic uncertainty surrounding the markets, is this a good time to get out?
Although the market cannot be reliably timed, there are ways for investors to cope with fluctuations. Asset allocation modeling is an investment strategy that seeks to reduce investment risk by spreading an investor's portfolio over a number of different asset types or classes. This diversified approach takes advantage of the tendency of different asset types to move in different manners and cycles in an effort to smooth out the ups and downs of the entire portfolio. Stocks, bonds, and cash (or cash equivalents) are the investments normally used. Tangible assets, such as real estate or gold, may also be included for further diversification.
The asset allocation process normally begins with an analysis of the historical levels of risk and return for each asset type being considered. These historical values are then used as a guide to structuring a portfolio that matches the investor's individual goals and overall risk tolerance level. It's crucial that an investor's portfolio allocation reflects factors such as their investment goal, time frame, need for liquidity, risk tolerance, and income tax bracket. As time passes, and as market and economic conditions change, it is likely that an investor's goals, and the optimal portfolio mix to reach those goals, will also change. Adjusting the asset allocation by rebalancing is a regular part of good investment management in both up and down markets.
Market volatility also impacts the implementation of an investment strategy. Rather than making a single, lump-sum investment, some investors feel more comfortable investing an equal dollar amount at regular intervals. This process is often referred to as "dollar cost averaging." It offers the advantage of buying more shares when the price is low and fewer shares when the price is higher. Dollar cost averaging does not assure a profit and does not protect against losses in a declining market. Dollar cost averaging requires an investor to make continuous investments regardless of the fluctuating price levels. Investors should therefore consider their financial ability to continue purchases through periods of low price levels.
Q: I used to receive an annual statement from Social Security detailing my historical earnings and my projected benefits. I read that these are no longer mailed. Is this correct?
A: The Social Security Administration (SSA) no longer mails annual statements to individuals. To verify your annual wages and confirm that your salary was properly posted to your account, go to the Social Security Web site at http://www.ssa.gov/. If there is any discrepancy, you need to contact the SSA directly to make adjustments.
Joel M. Blau, CFP, is president and Ronald J. Paprocki, JD, CFP, CHBC, is chief executive officer of MEDIQUS Asset Advisors, Inc. in Chicago. They can be reached at 800-883-8555 or firstname.lastname@example.org