Yesterday’s post about the down market stirred up a lot of angry comments because I encouraged the person to get out of stocks if they are scared. There was perhaps some justification to it because I interpreted the person who sent in the question to be very nervous when she may have in fact not been. Here’s the truth, though: if that person was as scared as I understood her to be, she should have never been in stocks in the first place.
If you are investing in stocks right now and you’ve been up late at night the last several nights reading stock news and sweating about what your 401(k) is doing, my perspective is that your portfolio should be more conservative. Decrease the portion of your portfolio that’s in stocks and increase the amount that’s in other assets (money markets, bonds, etc.). They might not return as well as stocks when the bulls are running, but they will always return in the positive.
Many of the negative comments were from people whose risk tolerance is high enough that they feel just fine through this bumpy ride. That’s fine for them – they have a high risk tolerance and if they’re happy with their investments, they should stay where they’re at. I completely understand the logic behind riding out this market and continuing with regular investments – things like dollar-cost averaging can potentially pay off big here.
Where do I personally sit? Generally, I stay in stocks and buy when the market burps when I understand the fundamental reason why that burp occurs. I don’t understand this one very well at all – it seems to me to be based on a fallacy that people with $30K incomes can repay $500K adjustable rate mortgages. When I run the numbers on that, it doesn’t seem reasonable or even possible, and with so many of these mortgages out there, someone’s going to have to eat some major losses when those houses go into foreclosure and suddenly those mortgages aren’t worth much at all. Who’s going to pay? Honestly, I don’t know how deep that rabbit hole goes (and neither does anyone else), so I’m not buying back into stocks for a while (I got out of stocks in my non-retirement accounts in June to pay for my own house). Volatility doesn’t bother me unless the volatility is being triggered by mass stupidity, which is why the markets make me nervous right now but other burps don’t.
However, if you simply can’t tolerate the volatility, my belief is that you should not be invested heavily in stocks.
What else should I do with my money? Focus primarily on paying off debts above all else – it’s never a bad time to eliminate personal debt. Invest in bonds or money markets, for starters – nice, stable investments that don’t see nearly as much volatility as stocks.
What about new investors? The best thing a new investor can do is get educated by reading a lot of books on investing, not just in stocks. Pick up books like The Bogleheads’ Guide to Investing, for starters, and watch what different investments do over time. Don’t feel bad if you get into an investment and then find that the volatility scares you. Just back out and invest elsewhere, somewhere more conservative.
What if I need the gains of stocks in my portfolio? You need to decide for yourself how badly you “need” a 10% return versus a 6% one. Is it worth lots of sleepless nights and anxiety, which aren’t good for your health? From my perspective, any investment that keeps you up at night should not be a part of your portfolio. If you need that 10% return, how about looking at your own life for some frugal choices so that you can invest more at 6% so you have that save dollar value at the end of the year? That way, you can sleep better at night and still have that dollar in your pocket.