What About the Stock Market? | Terry Savage – Huffington Post
What’s the worst thing that could happen to your stock market portfolio? The obvious answer is a bear market, one that takes the popular averages down at least 20 percent. In fact, many bear markets have seen a loss of twice that magnitude, including the bear of 2007-2009, which took the Dow Jones Industrial Average down 54 percent from top to bottom.
We have now reached the third longest period in Wall Street history without at least a 10 percent correction in the stock market, according to Jim Stack of InvesTech Research (wwwinvestech.com). This bull has been running 45 months since October 2011. The other two longest periods without a correction occurred from October 1990 to October 1997 (84 months) and from March 2003 to October 2007 (55 months). And we all remember what happened in 2007!
The DJIA fell from a close of 14,164 on October 11, 2007 to 6,443 on March 6, 2009. Of course, since then it has closed as high as 18,351. Still, it’s worth noting (for those who have forgotten) that the stock market can decline sharply, and typically falls farther and faster than it moves on the upside.
So back to that original question: What’s the worst thing that could happen to your stock portfolio?
The answer may depend on your age and stage in life. For a young investor trying to build assets in a retirement account, a market decline would not be the worst thing. In fact, it could be a huge advantage for the market to fall early on in her career. Declines in stock prices mean that a fixed 401(k) contribution of perhaps $300 per month would buy more shares of a stock market mutual fund at those lower prices. Then, when the market turns around to the upside, as it eventually will, that larger number of shares will provide more profits.
But what about the investor who is in or near retirement? A bear market at the start of retirement could be a truly devastating scenario. Not only is there little chance to recoup the losses because no new money is being added to the account. Even worse, the retiree could be forced to sell shares at low prices in order to fund required minimum withdrawals from her retirement account.
Beating the Bear
Emotional fortitude is another factor in dealing with the ups and downs of investing. Bear market bottoms are made when the last investors throw in the towel and sell their stocks, fearing even greater losses. When “everyone” has sold, the market can rally back to the upside.
No one rings a bell at market bottoms. And it takes real self-discipline to stick to your investment allocation in scary times. That’s why it’s better to check your asset allocation while the market is still rising — and decide what really is the worst case scenario.
Ask yourself this: Will you feel worse if you sell now, and the market continues higher – or will you be more emotionally devastated if you hang on and the market falls sharply?
That’s a tougher question. It’s hard to imagine how panic will impact your financial fortitude. So give yourself a break. Instead of waiting for that moment of truth when you might be forced to sell by your own fears, make at least a partial decision now.
Selling stocks is far more difficult than buying them. Whether you were right (and the stock is up) or wrong (and the stock fell), you have to lock in the results of that decision when you sell. No longer can you hope for a different, or better, outcome.
But there’s no law that says you have to be either all in or all out. Split the difference. If you’ve been invested for the past seven years, you might want to reap some of those gains and put the money on the sidelines. Especially if you are nearing retirement with little chance to recoup losses.
If you at least take some of the money off the investment table, you’ll be able to applaud your action when the market drops. And with cash on the sidelines, you won’t be as easily tempted to panic and sell at the bottom.
“Sell down to the sleeping point” is an old Wall Street adage. And it’s also a Savage Truth.
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What About the Stock Market? | Terry Savage – Huffington Post
