Friday, January 22, 2016

Making Lemonade from Lemons

January has not been very kind to global stock market investors. As of January 20, 2016, the S&P 500 is off nearly 10% for the year. By the same token, many had thought that U.S. bond yields would rise, but the yield on 10-year U.S. Treasury Bonds is lower than at the beginning of the year, less than 2%! Not a pretty picture. Which leads us to the question, what should I do?

Volatile markets lead us to look in the mirror and examine our asset allocation, our investments, and our tolerance for short-term pain. We can choose to do nothing, which may be the best thing to do, or take advantage of this sell-off and do something.

A few thoughts about what you can do:

  • 1.       Review your asset allocation plan. Are you comfortable with your stock, bond, and cash allocation? How do you know what is the right asset allocation for you? Legendary investor and founder of Vanguard, John Bogle, says you should allocate the percentage of your portfolio to bonds that matches your age. For example, if you are 50, you should have 50% of your portfolio in bonds. With interest rates as low as they are and many Americans living much longer these days, I don’t think that is the best answer. Your money will have to last longer, and historically, stocks over time offer the best returns for growth, however they also come with risk
  • 2.       If your allocation is not right or doesn’t fit your appetite for risk, REBALANCE. If your bond allocation has grown too large, consider selling some and reinvesting the proceeds in stocks. We have had a nice bounce from the stock market lows of 2008–9. Maybe consider selling some stocks and deploying that money in cash or bonds?
  • 3.       With the stock market being lower, make your IRA contribution sooner. Instead of waiting until April or later in the year, invest your contribution now.
  • 4.       If you have cash sitting on the sidelines, consider investing some now and bringing down the costs on some of your investments. The market rewards those with patience and a long-term perspective.
  • 5.       Sell some of your losers and take the tax loss now versus waiting until later in the year. Capital losses can come in handy to offset capital gains.
  • 6.       My biggest and best suggestion is to tune out the noise. Newspapers and television channels have to sell advertising. The best way to keep you glued to the TV is to scare you. The stock market doesn’t go up every year—it’s not a given. Over time it goes up more than it goes down, and those who ride out volatility are paid for that.

It is easy to panic and make rash, impulsive decisions. Better to empower yourself: consider the suggestions here and remember the wise words of Aristotle: “Patience is bitter, but its fruit is sweet.”