Carl Richards is a financial planner in Park City, Utah, and is the director of investor education at the BAM Alliance. His book, “The Behavior Gap,” was published last year. His sketches are archived on the Bucks blog.
With the stock market up more than 100 percent from those scary days in early 2009 and up 16 percent in 2012 alone, we’re now hearing plenty about how small investors are getting back into the market. Andrew Wilkinson, the chief economic strategist at Miller Tabak Associates, referred to it as a “a real sea change in investor outlook.”
It seems we’re in danger of repeating the same old cycle of swearing off stocks forever during scary markets, missing a huge rally and then deciding it’s time to buy when stocks are high again. On the flip side, I’ve had a number of conversations with Main Street investors who are asking if now is the time to sell because the Dow Jones Industrial Average is hovering near 14,000 and the S&P 500 stock index is around 1,500 again.
So which one is it? Should everyday investors be buying or selling?
Do you see the problem here?
If we’re investing based on what the market has done, it’s a recipe for disaster. Recent market performance tells us almost nothing useful about what the market will do in the near future. Logically it seems like it should, but a quick review of the market’s performance during the last six years should be evidence enough to convince us that it doesn’t.
Remember how you felt in March, 2009? I bet you didn’t feel like investing, and you weren’t alone. Almost no one did. It was a scary time. But it turns out that it would have been a brilliant time to invest. Again, not because of what the market had done, but what it was about to do.
But there was no way to know that in March 2009.
Did anyone expect (or feel) like 2012 was going to turn into a 16 percent year? In fact, almost all the unfortunate souls that make their living predicting the markets got 2012 wrong.
Here’s the thing we need to remember: we have no idea if now is the time to be buying or selling. But the good news is that it’s not even the question we should be asking. Instead we should be asking, “How can we avoid making the big behavioral mistake of selling low and buying high (again!) in the future?”
Instead of worrying about getting in or out of the market at the right time, take that time to focus on crafting a portfolio based on your goals. Start by taking out a piece of paper and writing a personal investment policy statement that addresses the following:
- Why are you investing this money in the first place? What are your goals?
- How much do you need in cash, bonds and stocks to give you the best chance of meeting those goals while taking the least amount of risk?
- What actual investments will you buy to populate that plan and why? Make sure you address issues like diversification and expenses.
- How often will you revisit this plan to make sure you’re doing what you said you would do and to make changes to your investments to get them back in line with what you said in number 2?
A personal investment policy statement can be one of the most important guardrails against the emotional investment decisions that we all regret in hindsight. So, when you get worried about the markets and are tempted to sell everything you own that has anything to do with stocks, go back to that piece of paper. If your goals haven’t changed, forget about it.
And when you get excited about that initial public offering that your brother-in-law says he can “get you in on,” pull out that piece of paper. If your goals haven’t changed, forget about it.
When your neighbors are all wrapped up in how the latest apocalypse du jour is going to ruin everyone’s retirement, pull out that piece of paper. If your goals haven’t changed, forget about it.
I know this might not work all the time. In fact, it might not work at all when we’re scared and dead set on getting out. But my hope is that having something we wrote when we weren’t scared will give us a little time to pause and ask a few questions before we do something that might end up being a mistake.
As a result, maybe, just maybe, we can shift the focus away from whether now is the right time to buy or sell and place it squarely on whether that decision fits into our own, personal investment plans.
Bucks Blog: The Question You Should Be Asking About the Stock Market
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Bucks Blog: The Question You Should Be Asking About the Stock Market
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Bucks Blog: The Question You Should Be Asking About the Stock Market
