As an investor, youneed to realize that the stock market will always have its ups anddowns. You can't do anything about these fluctuations - but you don'thave to let them wreak havoc on your investment decisions.
Of course, duringthose occasions when your brokerage statement contains unwelcomeresults, you may be tempted to take action by selling off some"losers." But is this a good move? After all, your investments may onlybe down temporarily. Furthermore, if you decide you must immediatelylower your risk level, and you replace your stocks with fixed-incomevehicles, such as certificates of deposit, you could harm yourportfolio diversification, reduce your growth prospects and slow yourprogress toward your important goals, such as a comfortable retirement.
So, what should youdo? Here's a suggestion: Look beyond your investment statements andseek out the following five pieces of information:
- Long-term returns -How have your investments done over the last five or ten years? Thelong-term returns will give you a truer picture - and possibly a morepositive one - of how you are doing. Be aware that a down market candrag down the prices of many stocks and stock-based investments. Bylooking at how your investments have fared over a period of severalyears, you can get a sense of whether they are just going through a badspell along with the rest of the market, or if they are, in fact,chronic under-performers.
- Total difference inassets from a year ago - If you've been investing regularly, yourbalance today may still be higher than it was a year ago, even if themarket is down. That "bottom line" may help encourage you to maintainyour long-term perspective and to continue following your investmentstrategy.
- Asset allocationbalance - Are you properly diversified? By investing in a wide range ofstocks, bonds, government securities and other vehicles, you canincrease your chances of success while reducing the impact ofshort-term volatility. Ideally, your investment mix should be based onyour risk tolerance, time horizon and long-term goals. You may want towork with an investment professional to design an asset allocation planthat's right for you.
- Price/earnings ratio -If the prices of your stocks have dropped, you might want to buy evenmore shares. Some of the world's greatest investors, such as WarrenBuffet, constantly look for high-quality stocks whose price istemporarily depressed. By doing just a little research, you can find astock's "price/earnings" ratio (P/E). A high P/E indicates that astock's price is expensive, relative to its earnings, while a low P/Emay be an indicator that a stock is attractively priced.
- Dividends paid - Evenif a stock's price is down, it might continue to pay dividends. And ifyou reinvest these dividends into the stock, you are adding moreshares, which can pay off for you if the stock's price rises again.(Keep in mind, though, that not all stocks pay dividends, and dividendscan be increased, decreased or totally eliminated at any point withoutnotice.)
Your brokeragestatement can give you a snapshot of your investments - but snapshotsrarely provide depth or context. To be a successful investor, look atthe "big picture."