The Dow is down 348 points, or 1.9%, as I write this. This is what the last 5 days looks like on my TDAmeritrade “Think Or Swim” chart:
Anyone who pays any attention to financial news should have been aware that many pundents were predicing “The Correction” was coming. Is this “The Correction?” Personally, I doubt it, and suspect there’s more to come. I could be wrong, and probably am. Today’s downturn was triggered by our friends in Greece (get a job!). Tomorrow’s will be triggered by Puerto Rico, or The Feds, or QE aftershocks, or or or or….
There’s always a correction.
The important thing is to remember the long term nature of investing. While there are occasional dips (some, granted, are long and severe), one can expect the long term return of equity investing to be favorable, but more volatile than other investment classes (warning: past performance is no guarantee of future results!). Below is the same chart as above, but instead of a 5 day view, it’s a 5 year view (note how many dips in the upward trending line):
Looks a bit better, having climbed from 9,750 five years ago to 17,596 today (an 80% increase over the 5 years, if my math is correct). I don’t expect returns the next 5 years will come anywhere close to the returns of the past 5 years, but that’s not really the point.
The point is to avoid reacting to the daily gyrations, and avoid making unwise financial moves in a panic to short term moves.
I don’t think now would be a good time to log in to my Vanguard or Personal Capital sites to see the carnage, so I won’t. I’m not burying my head in the sand, far from it.
Rather than listen to all of “The Noise”, my wife and I have built a long term plan and focus on executing it. Our automated purchases into our 401(k) and various mutual funds will continue to happen every month, on the same dates they’ve happened for years. Lower prices mean we’ll get more shares for the same dollar amount, the beauty of dollar cost averaging. Our cash cushion will continue to protect against short term withdrawal requirements. We’ll periodically “rebalance” by selling a bit of the “winners” and either building our cash reserve or investing in segments which have underperformed.
We won’t sell anything in a panic.
If it gets really ugly, we’ll start thinking about reallocating some of our excess cash and start buying, as we did in the ’08 collapse. Don’t move too quickly, as a “falling knife” can cut. Be patient, but rather than sell at the bottom, you should consider the opposite (buy low, sell high – easier than it sounds, but it really is the way to do things)
If it gets really, really ugly, I’ll delay my targeted retirement date, or tighten up the planned retirement budget.
The main points are these:
- Maintain a healthy cash reserve when times are good, to weather the bad times.
- Stay out of debt to the fullest extent possible, with the exception of your home loan.
- Build your cash reserves as you approach retirement – you should have a minimum of 2 years worth of spending in cash before you retire (we’ll probably have 3 years or more, to help offset the worry in our retirement years – though that strategy also has risks by not keeping returns strong enough to offset inflation).
- Develop a long term asset allocation strategy (how much in bonds, stocks, REITS, etc), and check it regularly (Personal Capital is great for this, as they’ll automatically calculate your asset allocation and show it in graphical format).
- Diversify, diversify, diversify. When one class is down, another class should be up (or, at least, not down as much), mitigating your risk.
- Re-balance occasionally (once/year is enough) by selling a bit of any sector that gets larger than your planned allocation due to strong returns, and investing the money in a sector that’s below your planned allocation).
- Don’t try to time the market, but also don’t ignore it. Monitor things and consider putting a bit more in cash when the markets look “frothy” (fortunately, we’ve moved our cash allocation a bit higher over the past 18 months as the market appeared a bit over-heated). Don’t sell AFTER a correction, that’s when you should consider buying.
- Make small, incremental moves. Repeat a month or two later if necessary.
- Nothing drastic at any one time.
- Control what you can control, and don’t worry about those things you can’t control.
I’d be lying if I said I don’t notice big moves, especially the downward ones. I do worry, but I keep it in perspective (my wife helps with that – smiles). I also have faith that there’s a plan for my life, and monetary issues are not the most important aspect of our lives. I keep my perspective on the bigger picture, and realize that even if the market collapses, we have a lot to be thankful for and our needs will be met (if not our wants). Have a contingency plan (for my family, that means we could always decide to have me stay in the workplace a bit longer than “ideal”, but we’ll do it if necessary. For you, it may mean downsizing instead of staying in the house you’d planned on retiring in).
Bottom Line: Keep the long term in perspective.
It’ll help you to worry a little less.
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