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Daily Q&A: What's a good strategy for dealing with the volatile stock markets?

What kind of tips do you have for dealing with the volatile stock market?

Here are some thoughts from Consumer Report's Money Adviser experts:

Following the herd. This emotional approach to investing often results in buying high and selling low, the opposite of what most of us want to do. But whether the Standard & Poor's 500 is up a certain amount or your neighbor is making a killing shouldn't matter to you. Your strategy should be based on your individual goals, time horizon, and risk tolerance, not those of your neighbor.

What to do instead. Put your investments on autopilot. Set up an appropriate asset allocation and make regular investments at set intervals, regardless of what the market is doing or pundits are prognosticating. If you're still some years away from leaving the workplace, consider target-date funds, which shift their mix of investments automatically based on your anticipated date of retirement.

Running for safety. In the aftermath of the 2008 market meltdown, many investors realized that they had too much invested in stocks and too little in bonds and cash. Some reacted by liquidating what was left of their stocks and pouring money into Treasury bonds as a safe haven. Unfortunately, that too could turn out to be a mistake. Should interest rates rise or the U.S. fiscal situation deteriorate, being locked into Treasuries, particularly long-term ones, or just having too large a bond position could mean trailing inflation.

What to do instead. Playing it safe might make sense if you don't have a long time horizon and can't wait for the market to recover. But if you want your portfolio to grow over time, you should continue to hold some stocks. If you're a bond investor, stick to shorter-term issues until the interest rate picture becomes clearer.

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Daily Q&A: What's a good strategy for dealing with the volatile stock markets? 08/27/10 [Last modified: Friday, August 27, 2010 1:26pm]
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