Four Mistakes to Avoid in a Flat Market
In many respects a flat, or sideways market, like the one we’re seeing today, can be more dangerous than when markets are definitively up or down. When markets are flying high, you know when you rebalance you’ll be selling off some of those winners, and using the cash to buy bonds and liquid hard assets. When the stock market is down, the rebalancing cash flow might be going the other way, so you might buy defensive sector stocks, while still hedging your bets with hard assets.
But a sideways market is difficult terrain because, bizarrely, there is no formula for navigating flat calm in investing. Once you’ve established that your portfolio is properly allocated for your age and risk tolerance, the silence can become deafening. Unfortunately, many small investors get the heebie-jeebies and end up handicapping their own returns. Here are the big mistakes people make in flat markets and how to avoid them.
Taking on Debt
When the economy is plummeting, and layoffs notices are a daily feature of our financial lives, most of us instinctively avoid taking on debt. But a flat market’s deceptive calm can make people think their jobs are secure and they can always borrow from a healthy 401(k) balance in an emergency. In business that’s called a “liquidity trap,” and it works just the same in personal finance. In a sudden downturn, the market, and the value of your 401(k), will crash through the floor.
A down market is followed quickly by layoff notices and hiring cutbacks. Losing your job in the crash means a long hunt for a new job and locking in steep losses, plus penalties, for borrowing from your 401(k)! In 2009 there was the added whammy of lower real estate prices. Many Americans watched all the financial instruments they counted on for a secure future vanish in a blink.
Letting Expenses Creep Upward
We live in a subscription world. There are subscriptions available for coffee, dog toys, shaving, the gym, music, software and just about any consumer product or service you can imagine. But subscriptions are like loans; the payments can add up quickly, and be on your balance sheet long after your enthusiasm has faded. It may not seem like a lot of cash at any one time but those small payments are money that you could be saving and investing.
There’s also the trap of, “I owe it to myself…” that we use to excuse excessive indulgence when we think the money stream will always be there. I’ve done it myself: “I deserve a new sofa, I deserve an expensive night out, or pricey tickets to the game.” But what we really don’t deserve are the month-ending high balances on credit cards, and especially the interest payments. What you and I should covet instead is the ability to pay, in cash, as you go, whether for regular expenses or emergencies, that is the hallmark of a truly financially successful person.
Forgetting to Rebalance
It’s easy to neglect your asset mix when markets are flat. Flat markets don’t make headlines and your 401(k) or investment portfolio simply drops off your personal radar, crowded out by the demands of a busy life. But flat markets are a great opportunity to diversify and rebalance, putting you in a better position to capitalize no matter which way the market ultimately moves. Especially for those of us forty-five and above, it’s crucial to recall that we no longer have decades to recover a sudden loss, and almost no chance to make up the gains we missed out on. While stocks should always be there for some growth, concentrating on locking in the buying power of your wealth for future decades should be paramount.
Getting Caught Up in the Drama
Flat markets are also tough times for the financial channels on cable television. They thrive on disaster, so if there isn’t a calamity handy they’ll start inventing one they insist is looming on the horizon. The market is due for a correction, they’ll warn, which is true in the best of times. Sure the market is going to correct; it’s also going to go up at some point and no one really knows which is going to happen. Being fed a steady diet of daily panic can make anyone nervous enough to make a bad trade.
By the same token, don’t let the calm lure you into a false sense of security. Without predicting disaster tomorrow, it’s fair to say markets are tumultuous places and the calm won’t last. Trying to trade in the midst of turmoil is financial suicide. Set up your asset allotment and get right before the next big bang.