Worried? Time for a Financial Checkup
Stock market investors may want to borrow a few words of advice from Winston Churchill: “If you’re going through hell, keep going.”
Recent market activity--punctuated by Monday’s 436-point dive by the Dow Jones industrials--makes it clear that U.S. stocks are in the midst of a bear market.
Unfortunately, while most folks agree on what a bear market is--a 20% decline in the major market averages--no one has ever been able to predict how long any given bear market will last, nor how painful it might get.
As a result, some experts say, investors who are following a well-thought-out strategy should probably stick with it--or use this period of uncertainty to create such a strategy and implement it.
“Make no rash moves right now,” advised Irving Holzberg, principal at IH Diversified Financial Planning in Menlo Park. “You can hurt yourself more by acting rashly than holding steady.”
That’s not to say this isn’t a good time for investors to reevaluate their strategy and make sure it is well-suited to their goals. A few points to consider:
* Is your portfolio truly diversified? Diversification means two things. It means having some money in all major investment categories--stocks, bonds, cash and international securities--and it means that investments in each of these categories are themselves diversified, meaning they aren’t concentrated in just a few industry groups or geographic areas.
Many investors have learned the hard way over the last year that owning shares of companies in different technology and telecom industries doesn’t constitute diversification.
Meanwhile, though virtually all tech stock sectors have plummeted, stocks in such sectors as insurance, energy, utilities and retail have rallied over the last year. So investors who have owned shares in those sectors have at least offset some of their losses in technology.
For mutual fund investors, diversification means owning several different types of funds, said Jill Hollander, certified financial planner with Financial Connections in Berkeley.
Hollander recommends owning funds in different investment categories--stock funds, income funds, international funds, for example--as well as diversifying by owning funds that subscribe to different investment styles, such as growth versus value and small companies versus large companies.
If your portfolio clearly needs better diversification, now is the time to decide what changes you should make and how to get there.
* Have you checked under the hood of your mutual funds? Some people assume they’re diversified because they own a number of mutual funds, which in turn own a lot of stocks.
Index funds, such as those that own all of the stocks in the Standard & Poor’s 500 index, do provide broader diversification. But if you invest in actively managed funds, you’d be wise to look at the fund’s top holdings. Some investors have found that all of their funds own the same handful of stocks, making them significantly less diversified--and more vulnerable to market swings--than they imagined.
* Have you considered your short-term goals? For financial goals that are in the near future--whether it’s buying a house or paying for retirement--it’s important to have a sufficient amount of money set aside in stable investments such as bank accounts, certificates of deposit, money market accounts and short-term Treasuries. That reduces the chances of having to sell stocks during a bear market to raise cash to meet the goal.
In other words, an important part of any bear strategy is having enough cash to pay for near-term goals. Investors who forgot that rule during the last decade’s bull market may need to save more or postpone their spending plans--possibly for a long time.
* Can you still meet your long-term goals? The trickiest part of any investment plan is determining how much money will be needed to pay for future goals--things like retirement and a child’s college expenses--and then saving enough each month to meet the goal.
A lengthy market decline can mean it is time to recalculate how much money and time will be needed to achieve long-term goals. Web sites such as Quicken.com (https://www.quicken.com) and Financial Engines (https://www.financialengines.com, mainly useful for retirement planning) provide handy online calculators for this purpose.
But whatever you do, don’t panic yourself into making changes. Abandoning a reasoned investment strategy simply out of fear of short-term loss is usually the worst mistake an investor can make, advisors agree.
“I have studied what happens when markets are falling and rising,” Holzberg said. “The worst thing that you can do is try to predict how long and how low markets can go.”
Why? “Upward moves happen unexpectedly. The more worried we are, often the larger the move when there is an upside,” he said.
Consider: The bull market of the 1980s lasted 1,276 days before the crash of October 1987. But, if you had missed just 10 of the market’s best days during that bull run, you would have missed 30% of the market’s return. If you had missed the 20 best days, you would have missed half of the potential return from that bull run, Holzberg said.
“Just like the three rules of real estate are location, location, location,” he said, “the three rules of investing are diversify, diversify, diversify.”
