As the market hits highs not seen since 2007, many people have a case of the jitters. Is the bond bubble going to burst? Is the market going to crash? Is Europe going down the tubes? Is the U.S. in decline?
Here’s some guidelines on how to deal with market stress.
Rule #1. You really don’t know where the market is going … and neither do they.
How else can you explain a world where for every story about the “bond bubble” waiting to burst, there is a second headline about how the S&P 500 stock index is poised for a swoon. On a given day, I have clients asking whether they should dump their bonds (due to the aforementioned “bond bubble”) and other clients asking whether they should sell their stocks (due to the previously mentioned market highs). Of course, the answer is usually “no” to both.
There are some good reasons to sell. For example, you should sell when your investments don’t make sense for you anymore and aren’t helping you to reach your goals. There are also bad reasons to sell, the top one being someone online thinks you should.
Rule #2. Stay within your comfort zone.
Here’s my rule: if you cut your overall allocation to stocks in 2008 because you couldn’t take the pain, don’t increase your allocation to stocks now. There are philosophical reasons behind this (it’s important to stay disciplined) and also tactical reasons (selling low and buying high is never a good plan). So take the lessons of 2008 to heart. If you had the urge to bail in the downturn, and gave into it, you’re just not meant to have that much in stocks … ever.
Rule #3. Just like with brain surgery, there are some things you are better off paying a professional to do for you.
Consider this a corollary to the rule above. There are some jobs that you may not have the temperament or skill set to do well. Or perhaps you have the skills, but lack the necessary detachment when the patient is yourself. Last week’s Wall Street Journal featured an excellent article about how the stock market’s recent rise – and the fear of being left behind – is propelling many investors back into the market (see: “Mom and Pop Run With the Bulls” by Jonathan Cheng). That’s clearly good news, since you can’t bankroll your retirement earning 0.25% annual interest on your bank savings account.
But here’s the real point. Young investors in their 30s – like the physician couple profiled in the article – who bailed on the market in 2008 and have been sitting in cash ever since, are lacking whatever element it takes to make good, long-term investment decisions. That’s not a crime. I’m not very good at reconstructive surgery (the speciality of the husband profiled in the article). But let’s face facts. Good money-handling skills are essential in today’s world. If you believe the hype that everyone can and should do it on their own, well, I’ve got a bridge to sell you. If market pressures lead you to make bad investment decisions, get help. It’s that important.
Rule #4. Make incremental changes to your allocation.
Here’s another corollary to Rule #2 above. If you’re convinced you need to change your allocation, do it by adding or subtracting stocks in 10% increments. In a downturn, rather than jump from 60% stocks to 0% stocks, try ratcheting it down to 50% stocks. If you’ve just become convinced that the market is leaving you behind, shift from 40% stocks to 50% stocks. Let’s face it; it’s not really about the market, it’s about you.
Rule #5. Keep your eye on the prize.
Forget what is supposed to happen in the next day, or week, or month. It really doesn’t matter. Stay focused on achieving your long-term goals. If you need growth over the longer term, you have to stay invested in growth investments over the longer term. It’s as simple as that. Don’t complicate things.
Rule #6. Turn off the television
And when all else fails, here’s the final rule when it comes to all the investment news, gurus, forecasters, websites, newsletters, infomercials and everything else:
Rule #7. Believe half of what you see and none of what you hear.