The stock market is overvalued and a crater in values may be next. So what should you be doing right now?
Most Americans contribute to the stock market through their 401(k) at work. Each paycheck has a set amount deducted from it (a process known as "dollar cost averaging") and it's kind of a set-it-and-forget-it thing. But now might be a good time to pay a little closer attention to your investments.
It is entirely possible that we'll see either a bear market or a correction in 2014. The former means a 20% drop in values and the latter means a 10% drop. No matter what happens, don't let the noise of today scare you from saving for the long haul. Just keep the following in mind:
Check your portfolio. When is last time you actually looked at your holdings? The first thing to do is a checkup. Figure out if your asset allocation makes sense for you. For many people, what makes the most sense is a target retirement fund. You select the year closest to when you want to retire and simply put all your money into it. Then the fund manager adjusts the risk level over your working years.
Know your retirement horizon. If you have 20 or 30 working years ahead of you, don't worry about what's going on today. Just keep dollar cost averaging. Do not allow news of today to take your off the target you are trying to achieve, which is long term financial security.
Don't put money in employer stock. When you take your 401(k) money and put it in employer stock, it's like putting all your eggs in one basket. You're getting your paycheck from your employer and you're hoping to build up a healthy retirement on your employer's back. Doing it that way ignores that companies have a lifecycle just like people. They do well for a period and then they may lose their way over time.
Investing should be dull so you get to live an exciting life. A lot of people think investing should be exciting because they live dull lives. I say exactly the opposite. That's how you survive if a stock market crash comes.
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