Tuesday, August 2, 2011
The stock market is volatile, should I continue to invest in my IRA?
Is this type of approach really the best way to handle your money? Absolutely NOT. If you are brave enough to get onto the roller coaster than you must find the strength to ignore your fear and allow the ride to finish. Really the stock markets as well as all markets are driven by only two emotions, 1. Greed 2. Fear , whether a market is up or down is simply an indication as to which of those emotions is winning out with the populous. By recognizing these emotions you will be better equipped to make wise decisions with your investments. Personally I am a buy and hold type of investor, I have fully funded my Roth IRA for the past couple of years and intend to do so indefinitely. In order to neutralize the effects of any emotions on my investments I have decided to fully automate my investments. What I have done is taken the full annually allowed contribution which is currently $5000 and divided that amount by 10, this gives me approximately $500 to invest during the first ten months of the year, the last two months of November and December are a buffer in case I don't reach this goal in time, in addition if I am fully funded by November than I have extra cash flow during the Holiday season. I have set up inside my IRA a total of 5 mutual funds, which I searched for and researched on my own, I have 1 mutual fund representing each of the following categories,
1. Large Cap Stocks
2. Medium Cap Stocks
3. Small Cap Stocks
4. International Stocks
This gives me a nice amount of diversity in my portfolio. Given my age of 27 I have decided to allocate 20% to each category. While many would advise me that I don't need to be exposed to bonds at this stage of my life I have found that the bond fund provides a bit of a buffer against the extreme volatility of the stock market, helping to smooth out some of the ride, in addition they provide a monthly income stream. As I get older I may decide to up this allocation to create a more conservative portfolio but for no 20% is working for me. I want to have the majority of my investment working hard in the equities market.
As I stated my investment is totally automated. This takes the decision making out of hand allowing me to focus on other matters without watching the day to day drama of the market. In addition this automated investment plan allows me to effectively dollar cost average my investments. During up months I am buying less shares of each mutual fund, and during down months I am buying more shares of each mutual fund. Over the long term this disciplined approach to investing has shown through research models to yield the best returns.
At my age even though I have a decent amount snow balling in my IRA , in a sick kind of twisted way I hope that the market stays injured, and in a depressed state for years to come. I have over 30 years for these investments to work for me, and the longer the market stays on sale the more shares of stock I will be invested in. In other words while the market is cheap I hope to take as much advantage as I can.
Please share with me your investment approach. Do you have any recommendations for me to make my approach better?