How do feel about investing after this month’s volatility?
Like a lot of people, the recent downturns in the market have really gotten me to rethink how I have my money invested. In Getting Ahead When The Market Isn’t the Wall Street Journal discusses what the recent downturns in the market mean for the average investor.
The main points in the article:
- U.S. Stock Markets have lost an entire decade of returns (WOW!). The S&P 500’s annual returns over the past 10 years are negative
- Dollar-cost averaging is still the way to go for steady performance and emotionless investing according to most financial planners
- Most 401(k) plan investors don’t have the desire to actively manage their investment portfolios (a topic we will look at when I review the book Nudge later in the week)
- If you are frustrated by the huge downswing in the market, it’s time to rethink your asset allocation to something less risky. This usually means a higher allocation to bonds and cash and less money in stocks
My thoughts:
I read a book a few years ago called Unexpected Returns by Ed Easterling that says the stock market goes through periods of extended uptrends and downtrends which the author called secular bull markets and secular bear markets respectively. We are currently in a secular bear market, which the author argues we will be in for some time. It’s a book that I plan on revisiting and reviewing soon, but it’s worth checking out if you’re interested in market cycles.
That takes us to asset allocation. In a period where you are expecting stocks to downtrend, such as in a secular bear market, it’s wise to put a larger percentage of your assets in cash and bonds, as the Wall Street Journal suggests. This is tough to do when common ‘wisdom’ tells young people like myself to put a majority of our assets in stocks. If you’re closer to retirement it’s a good idea to keep a larger percentage of your assets in less-risky classes anyway since you will generally have less time to recoup any losses. Imagine if you were planning on retiring next year and had 100% of your assets in stocks. You would have lost about 30-40% of your total assets, and your retirement standard of living would be way down, assuming you could retire at all after losses like that.
I do think dollar cost averaging and market index funds are still the way to go for most investors who want a hands off approach. I think 90% of your returns are going to come from good asset allocation strategies. If you don’t have the stomach to watch your portfolio fall 40% in one month, you had better increase your bond allocation.
Did anyone else reading this lose a large amount of money in the market in October? What are your plans for the future of your portfolio?
