Women & Money | Ignore market volatility; focus on the long term

Almost five months ago, when the Dow lost 416 points in one day, I happened to be on

Larry King Live.

He asked me what individual investors should do in the wake of the meltdown. My advice is about 180 degrees from what you might have heard from hyperactive market-watchers.

Things have stabilized since February, and the Dow and the S&P 500 have set record highs in the last few weeks. But my advice then and now is to stay focused on the long term and try to ignore market volatility. It's natural to feel concerned or even panicky when the market shaves nearly 500 points in one day.

It reminded me of my days as a stockbroker in the 1980s when my colleagues would be frantic whenever the market slid. They weren't just dealing with jittery clients; often, it was their own undiversified portfolios they fretted over. So they frequently overreacted by bailing out of investments at the low point.

This same type of mentality concerned me during the global market swoon that began in late February. I read and heard plenty of so-called market gurus yell "sell" one day and then change their minds in the following days and claim it was a good time to buy at the bottom.

I'm not referring to financial advisers who are fee-based and work with their clients to reach long-term goals, but to the short-term-minded money folks who think doing something is always better than doing nothing.

I realize that it's hard to remain calm and focused in the heart of a tough market. But that's precisely what's needed to succeed over the long term. Here's how:

1. Stay focused on the long term.

This is the most important investing advice there is, but it's also the hardest for many people to follow.

Assuming you have a well-thought-out portfolio, you don't need to do a thing when the market falls. In fact, if you have a 401(k) - and that's the source of most people's stock exposure - and you have at least 10 years or longer until you need your money, there's definitely a silver lining to market declines.

As long as you have high-quality mutual funds, exchange-traded funds (ETFs), or stocks and are properly diversified, every time the markets go down your 401(k) will buy more shares. And owning more shares is what helps you reach your ultimate retirement goal. Because when stocks rebound - remember that the long-term 10 percent annualized gain for stocks is more than double the return of bonds and cash - you'll have more shares that can rise.

Wouldn't you rather own 10,000 shares of a mutual fund so that every time it goes up $1 you make $10,000, instead of 1,000 shares, so you only make $1,000? Yes, the shares you already own will decline in value during the market downturns, but remember your 401(k) is not about what you have today. It's what you'll have 10, 20 or 30 years down the line.

2. Avoid the timing bomb. Long-term focus helps you avoid making one of the biggest investing mistakes - trying to outsmart the market by making frequent buy-and-sell decisions in reaction to news and events.

It would be ideal if we could pull out of the market at the first whiff of a downturn and jump back in right before the market shifts into rally mode. But it's absolutely impossible for anyone to consistently know the precise time to get in and out.

That's what's so dangerous about this jittery mentality: You jump out and feel smug when the market loses ground subsequently, but you really win only if you manage to get your money back into the market in time for the next upswing. There's no shortage of studies and data that point out the tendency for investors to buy stocks high and sell low.

Timing just doesn't pay, especially if your trading triggers commissions. Moreover, if the money isn't in a retirement account, you potentially have a tax bill to worry about, too.

3. Stick with stocks. In my earlier years, I had the bulk of my money invested in the stock market because I needed it to grow as much as possible. But I'm in a different financial situation now and can afford to take less risk by investing the bulk of my money in zero-coupon municipal bonds that earn about 5 percent tax-free, and investing a smaller portion of my assets in stocks.

A 5 percent tax-exempt yield is nothing to sneeze at. I would have to earn more than 7.5 percent in a taxable investment to match that.

But that doesn't mean I think everyone should load up on bonds. When your goal is to build a significant retirement stash, it's important to focus on stocks, assuming you have a long-term horizon.

Stocks offer the best chance for the largest inflation-beating gains over the long term. Stick with low-cost index mutual funds. Using a broad-based fund such as the Vanguard Total Stock Market Index (ticker: VTSMX) for about 90 percent of your investment money and the Vanguard International Growth Fund (ticker: VWIGX) for 10 percent of your money is a great strategy that makes it easy to weather any market jitters.

Better yet, dollar-cost average your investments on a monthly basis. It's the perfect move when the markets are choppy.