The market is down. There are articles and comments in social media saying it’s going to go down 90%, 40%, 60% in 2016! Who can tell you what the market is going to do tomorrow? No one. Now 300,000+ brokers are all guessing at what the market is going to do tomorrow …. Someone will come close, but is that luck or skill? Any study that has been done out there that is academically based says they don’t know. So if we really don’t know what the market is going to do tomorrow, what should we do?
There are many thoughts about this. Some are as follows:
- Stay as you are. This will pass.
- Take it out until the market is better. Go to cash!
- Change to a new strategy, because your strategy is broken, and I can better predict, select and outsmart the market.
The 3 Things You Should Not Do!
Let’s look at number 3 above, “Change to a new strategy, because your strategy is broken.” Who do you believe really can tell you what the market is going to do tomorrow? So changing strategies just gives you something different. You leave a portfolio that is underperforming, but you go to a portfolio that is actively managed and has little predictability of how it will perform in the future. Unless you believe in the clairvoyant, moving to an actively managed account makes no sense.
Let’s think more about number 2 above, “Take it out and put it in cash.” If we’ve already lost a significant amount of our portfolio we get so nervous that we can’t stand it anymore. So you might decide to take it out, which says that you know when it will be a better time to put it back in. See the day to put it back in the market is the day that it looks so bad that no one would put it in the market. All the financial writers are saying that it’s different this time, it’s never going to come back. So the dilemma with taking it out is not only did we miss the top of the market, but it’s almost predictable that we are significantly going to miss the bottom of the market. Our emotions just get the best of us. So I do not believe that this is the best choice.
How about the first option, “Stay as you are. This will pass.” But stay as you are is only a good plan if your portfolio is appropriate in the first place and is based on a plan and a strategy that makes sense for your lifetime. If your portfolio is poorly diversified, does not have proper allocation, and in fact correlation is not appropriate, nor is it fact-based…staying the course probably does not make sense.
Emotions equal poor choices!
So I suppose I’m telling you there is no hope. We might as well jump out the window because there is no hope of having a successful plan of investing. But I do not believe this is true. It is never too late to become prudent both in your investing and your planning. What do I mean by “prudent?” I believe it means the following:
1. You should have a financial plan. One that drives all your decisions.
2. You should understand what your portfolio will do in good years and bad years and then select your risk tolerance.
3. If you are within 5 years of retirement, your financial plan should be driven by the following 4 principles:
- You should have 6 months of cash flow need in emergency funds.
- You need to live on less than 3% of your portfolio per year.
- You need to have 5 years of cash flow need in conservative assets.
- You should have zero debt.
4. Your portfolio should be fact based and bring academic strategies to bear on your probability of success.
5. You need to have a plan about what you’re going to do in bad markets before they happen.
6. You need to be systematic, unemotional and diversified for the rest of your life.
Facts equal more predictability!
Will the above keep your portfolio from going down? No. But it should give you the confidence to do the right thing based on your plan, your goals, and facts rather than reacting based on emotion to the news media that feeds off your suffering and worry.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. Investing involves risk including potential loss of principal. No strategy ensures success or protects against a loss.