- Have income for about 5 years available in short term bonds and money market positions.
- An emergency fund of 3 to 6 months worth of income or expenses in cash does wonders for the psyche in a market like this.
- Do not stretch your expenses by using credit to make extra purchases such as cars, vacations, etc.
2. Don’t Time
If your short term planning needs are taken care of, it shouldn’t be difficult to adhere to the buy and hold philosophy. Even if you see your values drop, if you have 5 years worth of income, it would be hard to believe that in 2013 the market wouldn’t be back. Of course there are no guarantees, but we are far from a depression, and further from a “Great” depression. By definition, a depression is a economic activity shrinking by 10%. During the “Great” depression, the economy shrunk by 30%.
3. Don’t Be Greedy or Fearful, Just Be
It may sound a little zen-like, but let’s face it, most of us can’t time the market like Buffet. The best way for us to participate in the stock market is by keeping our ego checked at the door and attempting to just get in the market, and be happy with the returns it has to offer. Let good financial habits dictate your money success. Most people get into funds they expect to beat the market, and during times like these, get killed. Then they go conservative and never recover. By just buying index funds, you don’t have to worry about beating the market all the time. And if John Bogle’s success with the Vanguard 500 Index fund is any measure of success, we’ll be in the upper percentile of return because of low costs and broad diversification. Not to mention, you don’t have to watch, or worry about it. You can, well… just be. Of course, past performance is not indicative of future performance. There are no guarantees when investing in the stock market.
Rich Feight is a Fee-Only Certified Financial Planner and founder of IAM FInancial, LLC in Michigan. He is also the author of Thinking Beyond Numbers, the financial planning and investment blog that brings awareness to your financial habits so that you can make good decisions. You can learn more about Rich at IAM FInancial, LLC.