Author's note, even in light of the continued volatility in the financial markets of this past week, the ideas put forth in this post still hold true even though the dates and numbers have changed a bit. - 8/13/2011
Thursday August 4th was one of those frightening days when virtually everything fell. On this day many normally un-correlated asset classes moved in the same direction, lower. Further, the markets have been heading almost straight down for the past couple of weeks. What should you do now?
Don’t panic. This appears to be a market correction. We’ve had them in the past; we’ll likely have them in the future. As I write this, the S&P 500 stands at 1201. This represents a 77% increase from the March, 2009 low. While this is off the highs for the year and for the rally of the past two years, this still represents quite an increase off of the 2008-09 lows. How deep will this correction go? Obviously nobody can predict that.
Rebalance your portfolio. Assuming that you have a financial plan and an asset allocation strategy in place, this is a great time to review your allocation and rebalance if needed. You can certainly buy and sell holdings to get things back in balance. Other methods might include adjusting ongoing contributions to your retirement plans(s) and committing new cash to the underweight areas of your portfolio. Don’t forget to review your entire portfolio as a whole; this includes taxable accounts, IRAs, retirement plans, etc.
Get a financial plan in place. Reacting to short-term economic and market events is often a recipe for disappointment. Witness those fearful investors who sold out at the bottom in late 2008 and early 2009 and subsequently missed the ensuing recovery. Invest according to your plan. Remember, financial planning is not a one-time event, but rather is an ongoing process. Review your plan periodically and adjust as warranted.
Hire professional help if needed. Perhaps this is self-serving. The reality is that some folks do an outstanding job of managing their overall finances themselves. Many others have the capacity to do so, but don’t devote the time. Still others think they do a good job, their results would indicate otherwise. Many folks are just paralyzed by fear and confusion and do nothing. If you feel that you could benefit here are some questions to ask a prospective advisor.
The best suggestion that I can provide is don’t react to changing market conditions. Fall back on your financial plan and your asset allocation strategy for guidance. If I can help, please feel free to contact me.
In normal times, I don't believe in timing the market. However, I don't believe these are normal times. My savings and retirement accounts still have not recovered from the 08/09 decline, in which I continued to hold.
ReplyDeleteI know your industry's practice is to recommend staying invested in equities. However, given the current economic policies of the U.S. government, I see very limited upside for equites and significant downside risk.
Thank you for your comment and for visiting the site. My comments:
ReplyDeleteThough I am a part of the overall financial services industry, personally I have no particular bias in favor of equities or any other asset class. However, I urge caution to any investor who feels the need to get of equities or any other asset class based on short-term market conditions.
Many folks "got out" near the bottom of the '08-'09 market drop. They realized major losses and subsquently missed some or all of the ensuing rally. Most of my clients had recovered losses starting early to mid 2010.
Much was written about the lost decade from 2000-2010. For investors in the S&P 500 (via a fund, etc.) or large cap stocks it was a lost decade. However, for holders of a well-diversified portfolio returns over the decade were not so bad.
At the end of the day you and all investors need to do what is right for your situation. My experience says that over reactions to short-term market situations usually end badly.
I have no experience in financial planning and have no idea what company I’m want to go with. I am in the beginning stages of checking into it.
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