A lot of folks want to speculate about the direction of the stock market and our economy.
But I don’t spend my time worrying about such things. As we know, the stock market is volatile in the short term and up in the long term. For me, the question is: What can you live with?
If the stock market dropped 50% tomorrow, would that affect your living standard?
This question is not related to speculation about the stock market’s direction. Rather, it’s a question you should ask yourself every day to ensure your investments are structured to meet your needs.
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If a stock market drop will hurt your living standard, you need to pull some stock market risk off the table until you have a level of risk you can tolerate. For example, if the stock market drops 50%, is a portfolio that drops only 20% acceptable? You can control the drop in your portfolio by adjusting your asset allocation, but you must realize that protection from a drop will reduce future increases.
If a stock market drop will not affect your living standard now or in the near term, you can profit from a stock market drop if you are dollar cost averaging in your investment accounts. In fact, you need a stock market drop to build wealth using the dollar cost averaging strategy. The bigger the drop, the better. Keep a large proportion of stock mutual funds in your portfolio.
Quit trying to crystal ball the stock market, and implement a plan that works for you — regardless of the future.