With Dow recently crossing 20,000, the general mood among many investors is not euphoric but cautious. The uncertainty that some see in the new Trump Administration has extended to fear about its impact on world financial markets.
The argument goes like this. We are in the midst of an eight year bull market for US large company stocks. The last time we were in a bear market, defined as decrease in 20 percent in the S&P 500, current high school seniors were in fourth grade. Plus stocks are priced at high levels when taking in consideration the earnings of public companies. Finally with the new Administration, it’s grown more difficult to discern the economic future of our country.
The conclusion then becomes that we are on the verge of a bear market. If you find yourself having a hard time sleeping at night because of your investments, consider these steps to alleviate your concern.
Remember that Short Term Needs and Investing Do Not Mix. If you have funds in the stock market that are meant for short-term needs, you should quickly make plans to sell those investments. Need $80,000 for a down payment or $20,000 for tuition and board for your college student? That money should not be invested in the stock market.
Over five year periods, a diversified portfolio made up US and international stocks, and bonds have a consistent record. Since 1973 there hasn’t been a single five year period when a 60 percent stock and 40 percent bond portfolio has decreased if rebalanced annually. One year periods are a different story such as 2008 with a negative 24.8 percent return.
Putting money in the stock market in a disciplined fashion over time is called investing because we have a reasonable expectation that over time that the stocks we buy now will be worth more in the future. Investing in diversified mutual funds increases our chances as they tend to fluctuate less than individual stocks. But proper investing requires patience. Having a financial plan that depends on the stock market going up in a given year is a speculation, not an investment.
Buy a Fixed-Income Ladder. Our biggest worry when the market declines is not whether it will eventually recover or that free market capitalism will end as we know it. Instead we think about the reaction of individual investors. Study after study assert that individual investors as a whole do the wrong thing (and professional investors aren’t immune to this either!). When stocks go down, it’s our natural inclination to want to sell. During more buoyant markets, in most cases we want to buy more. We have our evolutionary biology to blame as our fight-or-flight response overwhelms the higher order cerebral thinking when faced with calamity or riches.
The best move is to prepare ourselves in advance for our own lizard brains. A five year ladder of high quality bonds, brokered CDs, or similar investments can help save us from ourselves. Purchase high quality bonds or CDs that mature each year for the next five years. If you’re nearing or in retirement, think about building the “rungs” of the ladder to be equal to the amount of cash flow you would need each year beyond pensions and Social Security. Knowing that you have five years of spending in secure investments can do wonders toward higher order thinking during market turmoil.
Stop Tracking the Market. This advice can be challenging to follow when the market is in a downturn. After all, it tends to command headlines in tumultuous times. Tracking the market (or even your portfolio) on a weekly or even a monthly basis doesn’t improve overall outcomes. In fact, our inclination when taking absorbing market data on daily basis is to “react” to it. Most of the time our reactions will be the opposite of desirable investor behavior.
IF All Else Fails, Try Something Less Drastic. If you decide that you absolutely must make a change in reaction to your belief of the stock market’s imminent tumble, consider not moving your entire portfolio to cash but instead some more incremental measures. Fulfill your need to take action by shifting new retirement plan contributions to safer alternatives such as short-term bond or stable value funds. This will leave the large majority of your portfolio intact. Just set a reminder in your calendar to change new contributions back to something more appropriate once your unease about the market has passed.