The stock market has done very well over the last few months, and yet that gets many people worried. Why? There are a number of factors but I think the best and simplest answer is negative space. The longer we go without a cataclysmic market drop, the more the anticipation of said cataclysm increases. After all, don’t you think we’re overdue for one? For visual types (like me), look at a graph of the market going up and up – the growing empty abyss underneath the line going up and to the right is an ever-larger potential hole for the market to fall back into.
Identifying the issue and figuring out how to deal with it are very different animals. We cannot put our heads in the sand and pretend that there will never be another bear market; nor can we ignore legitimate long-term signals that a recession may in fact be looming. But we also don’t want to run for cash as soon as we reach an all-time high and just camp out until the next drop; highs tend to come in bunches, and it could be years and years until the next big drop happens, and we’d miss out on a lot of growth in the meantime. Trying to time the market is notoriously difficult and will likely cost you both time and heartache.
So, what to do? Examine 1) your portfolio and 2) the rules for your portfolio. For money you don’t plan on using in the next few years, ensure you have a mix of stocks and bonds that can take advantage of continued good performance for however long it continues, but that you’re comfortable holding if there’s trouble. And make sure you’re diversified – across industries, companies and countries (these charts of Japan and Greece should illustrate why).
But the rules are key because they’ll help you make better decisions during stressful times. Put together your playbook before gameday; drawing up plays in the dirt while everything is crashing around you is a good way to do something you’ll regret. Write the rules down (pen, crayon, Google doc, whatever) and share them with someone so you aren’t as likely to re-imagine them later. And if the rules allow for some movement from stocks to bonds and/or cash, it’s best to make those shifts only apply to a small portion of the portfolio. If you need a rule about going from 80% stocks (and 20% bonds) to 100% cash, that probably means that you shouldn’t have had 80% in stocks to begin with.
Set up your investment allocations, then avoid the talking heads who shout opinions that have s half-life measured in seconds, and – this is critical – don’t check on your portfolio too often.