Fleeing a Downturn
By Gary Silverman, CFP®
My warning continues: The column is written about a week in advance. Things change. These days things change quickly. I’m willing to risk it.
As I’m looking at the stock markets while typing this, US and foreign stocks are down about 10% since the start of the year. Some areas of the market are down 3x that. This makes people rather uncomfortable.
As I mentioned last week, my general advice is to do nothing when this happens. My more nuanced advice is to tweak your portfolio by rebalancing to your chosen asset allocation. Since stocks are down, this probably means you’d buy stocks. More so, you’d buy even more in those areas of the market that are down the most.
That doesn’t make sense to a lot of (most) people when dealing with investing. “Why should I buy what’s going down…it makes more sense to buy what’s going up!” My regular readers know what’s coming next: the grocery store analogy…
If you like salmon and chicken, what would you do if salmon was on sale for 20% off while chicken prices had risen 20%? That’s right, you’d try to remember how much room you have in your freezer, and after leaving some room for ice cream (a necessary food group), you’d buy enough salmon to fill the rest. Likely you’d buy less chicken than normal, maybe none at all.
Yes, I realize that stocks can go down further. So can the price of salmon. Yes, I know that a stock can go to zero—so don’t buy just one, buy a bunch of them through a mutual fund or exchange-traded fund. And yes, stocks can take years to come back after going down —that’s why you don’t invest in stocks for needs that are only a couple of years in the future. Stocks need time.
Still, many (most) people have a hard time buying into an investment that is going down. That’s okay. You don’t have to buy them when they are on sale. Just don’t go selling them. Locking in a low price is just not a good idea.
“But what if I need the money this year?” Well, assuming your portfolio isn’t made up only of stuff that went down, sell what went up. (Buy low, sell high, is still a good strategy.) If you have all your investments in stocks or other things that have gone down considerably, then you’re in a bit of a pickle.
If you are pickled, then you have a choice: Hope that the market recovers before you need the money, or cash out what you will need now to stop the bleeding. Note that it is not the stock market that has failed you, it was your using long-term investments for a short-term need. Learn from this and do better next time.
Oh, and read my column.
May Ukraine stay free.
Gary Silverman, CFP® is the founder of Personal Money Planning, LLC, a Wichita Falls retirement planning and investment management firm and author of Real World Investing.