It’s sometimes interesting reading financial “tips” that don’t really contain much advice at all, like this gem on investing and the continuing crash that is the 2016 market from the New York Times. Boiling down the tripe, NYT columnist Ron Lieber tells us essentially that that’s how the market is, get over it and ride it out – unless maybe you’re not tough enough to handle the ups and downs that are the norm on Wall St.
What Lieber blithely ignores is the fact that many experts are predicting a bad-to-horrible 2016 and 2017. More importantly, over 34% of the population is forty-five or older. We don’t have time to ride out another disastrous couple of years in the hopes it all might recover by the time our kids are set to retire.
It’s true that quite a few people got caught in the latest crash with too much of their investments in equities. That would be particularly true for people nearing retirement age, who are now worried that those plans will be delayed by market losses. Lost in the parade of platitudes is any real practical investing advice. It’s also hard not to notice the same voices dispensing useless platitudes today were the some of the same ones telling people to go heavy into the stock market a year ago. The mainstream financial media moved from bad advice to useless wordplay, that is not an improvement.
For anyone in their fifties, this is the second time they’ve seen equity gains wiped out in the last ten years. The message that was missing from the last stock market meltdown was one of asset allocation. How to make age-appropriate adjustments to your asset classes and how periodic rebalancing shields your investments from whiplash volatility as you get older. Approaching retirement should not be a hold your breath moment, it should be a time of calm certainty.
The Days of Set it and Forget it Are Over
You don’t have to be a stock picker or market genius to set up a diversified investment portfolio but you do have to be committed to tending it. A lot of people get their investment mix right and then make a huge mistake – they forget about it. If you did that after 2009 then your investment mix quickly became skewed in favor of equities. You’ve also aged nearly ten years in that time frame. Although everyone loves growth, and you’re not alone in finding it hard to sell high, as you get closer to retirement you need to rebalance away from stocks that can lose value just when you need those funds the most.
If you’d been rebalancing your portfolio once a year since 2009 you’d have sold equities at the end of 2012, 2013 and 2014. All of those were very good years in stocks and not great years for bonds. You would have been selling stocks doing well and buying bonds not doing as well. You would also have taken some of your cash, which was doing really well, and bought hard or tangible assets like investment-grade gold and silver. Another way to say that is you would have been selling high and buying low. You also would have been trimming the percentage of your investments in stocks by roughly one percent a year while expanding the percentage of bonds and hard assets and cash by the same percentage.
Had someone in their mid-forties been rebalancing his or her portfolio in the years after 2009, today that person would have had less than half of their wealth in stocks, more than a third in bonds and a sizeable amount of gold and silver, plus some cash for emergencies. Equities cratered in the recent crash, but bonds and gold are both higher. While the stock loss might sting, the losses would have been limited and partially offset by gains in other asset classes. That’s how asset allocation and rebalancing work together to lock in gains and protect your portfolio from volatile losses. Funny how that solid, conservative investment advice never seems to get much air time when the stock market is flying high. It may not make dramatic television, but it sure would save you on antacids. It also keeps you from reacting out of fear and maybe hurting yourself even more than the market has.
So what to do now? It’s never too late to do the right thing and you may need to just eat the loss you can still get your asset allocation in line. Or you can try waiting until the markets recover but experts aren’t sure how soon that’s going to happen.
Probably the biggest lesson of the current crisis is not to count on the mainstream financial media to be any actual help. The keys to building wealth, ones that just don’t change, are allocate, diversify and rebalance. Do that and your happy retirement won’t involve crossing your fingers and hoping for a market rally.