Is the Bull market over? Are rising interest rates going to hurt bonds? What about the volatility in the Chinese stock market? Markets seem so shaky! Many people are worrying if they should do something with their investments. What should they do?
I have some bad news, no one knows the answers. Timing markets (reacting to short-term developments) does not work. It has never worked and probably never will. Let me repeat, no one knows, not me, not Crammer, no one.
Even though market timing doesn’t work, this is what everyone talks about. What should I buy now? Should I move to cash? Get out of bonds?
Those are all the wrong questions. Why? Because the direction of various markets is unknowable.
More importantly, you don’t need the answers to these question to invest successfully. So what should you do? Understand that making money in stocks is a slow process that unfolds over the long-term, not the short-run
Why do stocks go up? They go up primarily because good companies make profits year, after year, in virtually every industry. These companies grow, hire more employees and then make more profits. This has been going on for years, decades, even centuries. History is clear. Stocks go up. In between they are volatile, this is where the trouble begins.
There are many reasons for the volatility: day traders, economic outlooks, politics, wars, inflation etc. On top of that you get those who predict the next doom and gloom scenario so often that they eventually predict something that actually happens! (Remember that a stopped watch has the correct time twice a day). Remember, no one knows where markets are headed. And in today’s investment environment, you can invest around the globe. There are markets in the U.S., Europe. China, Japan, Brazil and developing Europe, just to name a sampling.
Our philosophy is to own a diversified portfolio for the long run. We develop a model portfolio, with assets of many types, spread across various investments. Stocks should represent somewhere between 40-70% of a portfolio depending on risk tolerance, goals and ability to handle volatility, emotionally.
Remember stocks go up about seven years in ten. That means three out of ten they go down. When they go down it hurts, you will feel the need to fix things but you can’t. If you try, often you will do exactly the wrong thing.
What should you do when stock go down? If you don’t need the money for a while, buy more stocks. Why? Because they will go back up. We know this to be true. Yes, some companies will go out of business so you must always own many stocks, to reduce your risk. If you own one stock, you could lose all your money. What are the chances that 500 of America’s large companies all going out of business at the same time? You should own many types of companies: large, small, growth, value, international and emerging economies. They should be in different sectors of economy both domestically and worldwide: industrial, healthcare, science, consumer cyclicals, etc.
The balance of your money should be in cash, bonds and real estate. These all generally will perform differently. This is good. Why? You don’t want them all going down at the same time, disaster. We want to avoid that.
This is a good philosophy which needs to be implemented through a sound strategy. What are you going to buy? In what percentages? How often should you rebalance? Strategy is important. Having the emotionally fortitude to execute the strategy, can be the hard part. Not so difficult when markets go up but when the Bear Markets appear, it can be very tough.
The key is to stick to your philosophy and strategy, have the discipline to rebalance. This means you are buying what is going down. This can be hard when the media is telling you the world is going to “hell in a hand basket.” You need to tune out the market timing, the loud noise, and stick to your plan.
Are you doing these things? If not, you should be.
It is important to be familiar with the behavioral finance questions that inform investing. There are researchers at several major universities programs trying understanding why people do the wrong things, at the wrong time. Why do people consistently take mental short-cuts that turn out to be completely misleading?
We are wired to avoid danger. This internal wiring causes many people to be poor investors. They do the wrong thing at the wrong time.
Believing that you can figure out when to get in and out of stocks, bonds and cash is a mirage. Don’t believe me? Read the article by a person that built his life around market timing.
In our business, I believe, we add the most value by helping clients avoiding big mistakes that are caused by fear that they are losing control of their financial security. An example would be to prevent a client from going to a 100% cash portfolio, in 2008. I can’t tell you how many people wanted us to purchase gold in their portfolio in 2010. These things feel right, at the time, based upon fear associated with losing it all. To prevent people from doing the wrong thing takes patience and a very strong relationship. We remind clients early in our relationship that Bear Markets are not ifs, they are when’s. Ask yourself whether you can avoid emotional reactions on your own. Think about 2008. How did you handle your portfolio? If you had help, was your advisor there for you?
If you are confident in your own ability to remain calm in the face of adverse market conditions you may be one of the rare individuals who can manage money for themselves. However, if you feel the need to tinker with your investments every time you turn on the news, you need to find an investment advisor you can trust. We recommend a fee-only advisor. Someone that can help walk you off the ledge when you are about to make a big mistake. These people can make a difference in your life. If you already have a good relationship with an advisor be thankful.
Get a plan, and stick to it. Have the discipline to believe that that patience is the key to successful investing. Bear markets recover, at least they have in the US over the last 100 years. Finally, tune out the constant noise of investment speculation and be thankful that you are living in a country with the strongest economy in the world.