Some time ago, the Dow Jones closed at 6,700. Look at it now!
So far, my earlier prognostications and expectations about the stock market possibly revisiting its lows somewhere at the 6,000 level for the DJIA, have been proven “wrong” (I owe some of these prognostications to the influence of my other half who still can’t feel the love for our economy). Instead of the market sliding down into the abyss and hitting the previous low of 6,700 (thereabouts), it has instead done an about face to flirt with 10 month highs, ameliorating worries among investors, the world over.
Are Stocks Really “Back”?
While I’m not sure I’m convinced about how solid this turnaround is — with unemployment rates still expected to stay up, along with jobless claims — I’m a little less anxious than I was earlier this year when the market was hopping around like a toad on a roller coaster (it was that bad, remember?). At least now, we’ve got some choices ahead of us. You see, what the last year has done was to show many investors that they may have gotten in way over their heads — some of us have become more and more aggressive about taking risks the longer the bull market lasted, and we’ve become spoiled by great stock market returns. Now that the market has shown us just how hard it can pull back, this mini-recovery may be a good time for us to evaluate just how “right” our investments are for us at this time.
Image from SparkleTags
Some questions to ask yourself about your stock investments today:
1. Are you overextended? Shelter some of your funds by placing them in safer accounts (go for those high yield savings account interest rates).
2. Are you diversified enough? Reallocate your funds across different asset classes to better manage your risk.
3. Are you prepared to see the stock market dip yet another time? If you feel a knot in your belly just thinking about this, you may want to scale back on your investments.
All this aside, I thought to show you this neat interactive graphic (from the NY Times) that may give you some idea about how well your portfolio can recover over time. Here’s how I’ve used it (as an example only… this is not my real portfolio 😉 ).
When Will Your Investment Portfolio Return To New Highs?
For the specific example I provided here, I entered a portfolio value of $300,000 at the market peak with its current value today at $192,000. If I contribute $4,000 per year and estimate an annual return of 7.4% going forward, this portfolio will reach its former high of $300,000 in 7 years. Still seems like a long time, but you can speed up the process of getting your portfolio back to where it used to be if you raise your contribution amounts (or find a way to get better returns).
By aggressively adding new contributions to your investments — which is something you can control more easily than the annual rate of return of your investments — you’ll cut that “waiting period” by a lot. For example, if you decide to invest $20,000 a year in a portfolio returning 7.4% per annum (instead of a puny $4,000 a year), then you may be able to shave off a few years from your wait. In fact, it’ll only take you 4 years to restore your portfolio to its former glory.
So how long do you expect to wait for your portfolio to come back? I’m not having any illusions here, so I’m prepared to wait a long time. Actually, right now, I’m not worrying too much about my investments. Instead, I’m trying to focus on improving cash flow while I keep an eye out for more convincing signals that the market is finally back on track.
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