Problems with waiting out the market
This is the final of three articles based on a letter I sent my clients in mid-October. Last week’s article stated that either the people who say stocks are going up are right or the ones saying stocks are going down are. Either way, this is a short-term scenario, so you don’t really have to make a decision—all you have to do is wait. But there are three problems with this.
First, it seems so simple that it can’t be right. Well, it is. At least it has been for well over 100 years. The waiting can drag on. Things like a well-diversified mix of assets and periodic rebalancing can reduce the wait, but it will take time.
Second, folks like to think they can know when the market will go down and when it will go back up so that they can avoid these “problem” markets. Some think that I can do this. They are wrong on both counts. If you can actually do this, then how come you’re not running a multi-billion dollar mutual fund? (And no, the people running multi-billion dollar mutual funds can’t do it either.)
Third, some folks can’t wait for the market to get better. They don’t have enough time between now and when they need the money for the market to come back up. Now that is a very valid problem; so let’s look at how it might affect you.
If you have a need that is a good 10 years out, and if you can ignore all the naysayers, you’ll do fine having a good portion of your portfolio in stocks. If you have a need that is 5-10 years out then you will likely do fine with about half of your portfolio in stocks. But if you have less than 5 years until you need to use the money, I contend you should be very hesitant putting more than a small portion, if any, of the money in stocks.
Note that this isn’t a recommendation, as I don’t know you and I don’t know your situation. It’s more a reflection of what I’d probably default to if I were you. But I’m not you. I have my own needs, fears, expertise, experience, and finances. So you’ll need to do more homework to see how you fit in to all of this.
Aside from knowing when you are going to be using your invested money, the most important thing to consider is your risk tolerance. I’ve gone on about risk tolerance in the past, so I’ll just summarize. Don’t get excited when the markets are good and put more into stocks (and other risky investments) than you can stand to own when the markets fall.
Given all of that, my message in this series of articles remains: Don’t let the short-term gyrations of the market cause you to make poor long-term decisions when it comes to your investments.
This article was published under the title "Tolerance for risk factors into choices" in the Wichita Falls Times Record News on November 23, 2014.