Should I Stay or Should I Go?
The title is from the British punk rock group, The Clash. However, it feels very relevant in today’s stock market environment. We have investors constantly enquiring as to when and if they should sell out of the market. It’s easy to understand this question, especially as this year is off to a horrible start. But, before doing anything, first try to understand what’s happening in the world. First and foremost, the global economy is still growing, even if its rate of growth is less than the “experts” believe. Take for instance the US, Banks and individuals are supposedly carrying a lot less debt now than they were. Therefore, if that’s the case, they should have more “rainy day” funds on hand if the downturn worsens.
The goal for most individuals is to invest for decades and not days or months. Yes, markets move up and down, but according to reports, over every 15-year period since World War II, people have generally made money, sometimes a lot of money. The markets tend to reward optimists and pragmatists for that matter. When markets fall or have fallen, “smart” investors are very likely to have applied the following strategies:
1. DON’T Panic. Investing is as much about psychology as it is about the raw numbers. Selling out of fear is almost always a mistake.
2. Diversify. Not applying this strategy might be the number one mistake made by individuals. Basically, it means don’t put all your eggs in one basket. An article I recently read stated that the Bible and even Shakespeare spoke of not putting all your money in one asset.
3. Rebalance. It is critically important that from time to time, to check in and make sure a portfolio is still adhering to the plan. Taking the concept further, from an intuitive standpoint, this makes all the sense in the world. Many people like to believe they buy low and sell high, but empirical data suggests otherwise. Rebalancing, means buying those asset classes at a low which have dropped in value and selling the ones that have done better at a gain. Moreover, by rebalancing it can reduce the risk in the portfolio.