Investors are a jittery bunch.
To say they are getting nervous now would ignore the fact that most are antsy all the time.
Looking at headlines and talking with money managers, however, it’s clear that anxieties are on the rise. Whether it’s interest rates or news from Greece and concerns over the future of the Euro, the ups and downs in China, or the long-in-the-tooth, can’t-go-on-forever bull market, there’s something for every apprehensive investor to latch onto.
And that’s before an individual adds in their personal concerns, such as their shrinking time horizon to recover from any market setback before retirement, or fears that they will be next to lose their job and face a forced early retirement.
Every investor can come up with a “biggest fear” right now, the kind of thing that would cause them to lose sleep at night if they fixated on it.
No matter the fear, the investment solution is pretty much the same, and it isn’t “run away.”
Yes, there will be someone who makes a call to get completely out of the market and has perfect timing and gets to crow about it, is lionized by the media and becomes a guru (at least until some future point when they’re not so lucky and their advice looks bad).
You’re not that guy.
The solutions for investing with those fears in mind are pretty much the same no matter which worry is foremost in your mind. What’s more, they are the old, boring saws you have always heard as an investor, which makes them hard to take seriously when nerves are running high.
Before we get to those solutions, however, most investors need to reconsider how they view both risk and volatility.
In each case, the standard person looks only at the negative. When the market falls by 300 points, investors worry about the volatility; they’re not nervous when the market gains 300 points, even though it is the same percentage move.
Likewise, risk is seen as the chance to lose, when it also is the chance to win.
“Risk,” wrote Meir Statman of Santa Clara University, a leading researcher in behavioral finance, “is payment for a chance to reach our aspirations.”
Every investment is “risky” in its own way. Bonds offer safety and stability, but may not provide a chance for most investors to grow their nestegg sufficiently to reach their aspirations; conversely, riskier stock investments may provide the best opportunity to reach goals, but also bring out the scary possibility that the market will leave you with significantly less than you actually saved.
The result is a common mindset, typically expressed something like this: “I can accept risks; I just don’t want to lose any money.”
This plays out when people hesitate to take risks when the market is at a low point and looks like a bad bet, but jump into rallies that are near a top. Fund-flow numbers bear this out, showing that many investors won’t commit to any security until there’s a spate of good news and they feel like they’re getting a sure thing.
Unfortunately, this is a recipe for buying high and selling low, watching the fears play out in real life and making it harder to get things right the next time.
With that background in focus, let’s get back to the things an investor must do to address their fears now:
This is how overall portfolios are built.
Rather than focus only on what makes you most comfortable, diversify so that you address all of your fears and all of the risks. Like it or not, you face market risk, inflation (purchasing-power) risk, interest-rate risk, longevity risk (the chance you will outlive your money), political and societal risk and more, even when the headlines aren’t scaring you.
Rebalancing a portfolio involves getting back to the plan, so that if your portfolio was supposed to be 60 percent stocks and 40 percent bonds, but the rising market has made it so that the mix stands at 70-30, sell some of your winners to get the portfolio back onto plan.
When you reinvest money during the rebalancing process, you are putting it to work in the segments of your portfolio that are cheap, relatively speaking.
The same goes for investment selections; if you don’t have a reason to pay more money for active management – where you are confident that the extra costs will be rewarded with additional returns -- don’t.
Headlines are good for keeping you entertained, but they tend to be bad for your emotions and investments.
Adjust your financial plans based on your needs, goals, changing time horizon and risk tolerances, not based on what you read about, see on television or hear from friends and acquaintances.
If you can avoid becoming a slave to the news cycle and the short-term, you have a better chance of reaching your long-term goals, no matter which of the things you fear becomes something everyone ultimately worries about.