Yes, wild stock market gyrations can make any investor nervous. But what to do? Buy? Sell? Pop another aspirin? One of the most readable (and sensible) pieces on the subject is by Robert Powell (editor of Retirement Weekly) for marketwatch.com. Here are major excerpts from his article:
“Stocks go up, stocks down. And stocks are volatile — in the short and the long run.
“That, my friends, is the long and short of it.
“But just because stocks go up and down, and sometimes down quite rapidly and seemingly unexpectedly, doesn’t mean you have to act like a novice or even average investor who sells at the bottom and buys at the top.
“Instead, no matter whether you’re four years or 40 years away from retirement, there’s only one of three things you should do right now:
- Stay the course if your investments are on the course you plotted.
- Adjust your course if you’re off course.
- Plot a course if you don’t have one.
Stay the course
“Start here. Let’s say you have a course. Let’s say you started the year — after analyzing your long-term goals, your time horizon, and your tolerance for risk — with your assets allocated in the following manner: 60% stocks (using the MSCI World NR USD index as our proxy), 30% bonds (using the Citi WGBI Non US USD as the proxy), and 10% in cash (using the Citi Treasury Bill 3 Month USD index).
“And let’s say that you decided not to rebalance unless the assets in your portfolio are five percentage points or more away from the target allocation.
“So how would your assets be allocated as of the market’s close on Tuesday [Aug. 25]? Not much different from the start of the year. You’d have 61.68% in stocks, 28.29% in bonds, and 10.01% in cash, according to data provided by Morningstar.
“In other words, for all the ups and down in the market this year, there’d be no need for you to rebalance your portfolio — or at least that would be the case if you have the discipline to stick to your plan.
Alter your course
“Now, let’s say that your portfolio has changed even more; let’s say (because stocks continue to fall and bond continue to rise in value) that you now have 55% invested in stocks, 35% in bonds, and 10% in cash — which is now five percentage points away from your target allocations. What then? Simple: You would rebalance. You would sell five percentage points of the bonds that have risen in value and invest that money in stocks. And what’s the net effect of that? You’ve sold high and bought low. That’s how it works. No need to panic.
Set a course
“OK, let’s say that you started the year investing without a plan, that your portfolio was built without rhyme or reason, that you never took the time to determine how much to invest in stocks, bonds and cash based on your investment goals, risk tolerance, and time horizon.
“What’s more, you don’t have a plan in place that tells you when to sell or buy. You’re operating without chart and your portfolio is moving in whatever direction the winds and seas take it.
“Given what’s going on in the stock market these days, you’re likely in a panic, wondering whether to sell or buy based on what’s going on around you.
“Well, to that we say, it’s time to stop panicking and time to start putting pencil to paper and finger to calculator. You need a plan — an investment policy statement — and you don’t have a moment to lose. Yes, you could just simply pull all of your money out of the market and invest it in your mattress; that might take you out of your misery.
“But that will only lead to regret. Recall for a moment what happened in 2008, when instead of staying put, or rebalancing, some investors bailed. And then they stayed out of the market. And then they watched other investors reap the rewards of staying the course or even buying low.”