When I think of the stock market, especially in down times like this, I try to picture a big rubber band. A law of physics (not sure which law, but some law!) tells us that the more the rubber band is pulled back, the faster and further it will fly when released.
So it is when the market pulls back, as it has in the past few weeks. Going by history, we have more reason, not less, to be optimistic about the market’s future returns.
Remember 2008? It was a brutal year (S&P 500 down -37 percent). But the very next year, 2009, the market snapped back (S&P 500 up 26.5 percent), and continued to climb.... For every dollar you had invested in the S&P on January 1, 2009, you would have had $2.60 by December 31, 2014.
In 2015, this past year, the index hardly moved at all.
In the past 21 days of 2016, we’ve seen a fall in the index of about 8 percent. Small caps and foreign stocks (which, together with the large U.S. stocks of the S&P, form a well-diversified portfolio) have generally moved in the same direction as the S&P, only with greater swings.
I urge you, as I did in late 2008, not to panic and sell. If you’ve taken my advice in the past, you have plenty of money outside of the market, so that if you need to withdraw cash, you shouldn’t have to sell stocks. Not now...not for months, or even years to come.
In fact, as difficult (even nauseating) as it may be, now may be a good time to buy. Don’t try to time the market -- just keep your portfolio in good balance. If we designed a portfolio for you that was 60/40 (60 percent stock/40 percent bonds), then the recent slide in stocks may mean that your portfolio is looking more like a 55/45 portfolio. To get it back to where it was, to “rebalance,” means selling bonds and (gulp) buying stock.
I generally recommend doing this no more frequently than once or twice a year, largely to avoid unnecessary taxes and (often hidden) costs to buy and sell. But if your portfolio is too out of whack, it might make sense to rebalance sooner. There’s no strict law about when to rebalance. This is finance, after all, not physics. If you’re unsure whether to rebalance, let’s get in touch. If I have your assets under management, I will be checking your balances in the coming weeks, and contacting you if your allocations are too far from target.
Oh....If you are disheartened that your foreign stocks have lately fallen harder than your U.S. stocks, and you are thinking about abandoning foreign stocks, PLEASE read the attached article from Vanguard, which argues very convincingly that now may be exactly the wrong time for “home-country bias.” Note especially the chart that shows how U.S. and foreign stocks have flip-flopped over the years, with yesterday’s losers becoming the champions of tomorrow.
In the publishing world, I want to remind you all that the newly updated “portable editions” of Investing in Bonds for Dummies and Investing in ETFs for Dummies are available wherever books are sold. “Portable” means that they have been condensed from the earlier Dummies editions, from roughly 350 pages to 250 pages, and the book dimensions got smaller, too....Easy reading!
And if you are going to the bookstore anyway, I highly recommend The Devil’s Financial Dictionary, a new book by Jason Zweig of the Wall Street Journal. It’s very funny, and yet also provides a scarily accurate look at the world of investing.
Here is the Devil’s definition of the word correction, which seems especially pertinent to the current market:
Correction, n. A moderate decline in the market that the people who think they have recognized it believe will not last much longer. It could, however, turn out to be the beginning of a full-blown bear market, nothing but a dip, or the beginning of a bull market. Only after it is over will anyone know for certain what it was.
In the next few months, we’ll see where this “correction” goes.
In the meantime, keep your focus on the long run, and turn off CNBC!