Yes, the double digit stock market increase gravy train is over, probably for a long time. What we’ll see instead are years of returns that are normal to slightly below normal. It would take a really strong person not to react to the 1,000 point death drops we’ve seen in the market since August. It’s natural for your brain to be screaming Sell! Sell! Sell! at you and the market is proof that many people listen to that voice of panic.
Perhaps ironically, it’s not during the meltdown that many stumble but shortly thereafter. Those mistake are surprisingly common and most of them have a common root in impatience. After getting used to seeing that balance go up and up much more quickly, it can be a little less inspiring to watch the rather plodding advancement of 4%-6% returns. Here are the common mistakes to avoid during times like these.
Take On Increased Risk
Trying to get returns back up, investors will sometimes get impatient and greatly expand their level of risk chasing returns. Do that long enough and you will lose money, big money. Investments with a high risk premium, meaning they pay a higher return, are weighing that risk against losing your entire investment.
Get Too Conservative
The opposite side of that coin is pulling your money out of the stock market and putting it in bond funds or a money market account. Sure, you’ve lowered both your risk and perceived volatility but you’ve also hobbled your returns. By going too conservative, you’ve basically decided to slow the rate of loss to inflation.
Trying To Time The Market
You’d do well to remember the old saying that the market can stay irrational longer than you can remain solvent. You may save a few bucks here and there, just by pure, dumb luck but it’s a losing strategy. Some funds take days to clear and trading individual stocks is a loser.
Watching Financial Television
Financial television and financial media are fountains of conventional wisdom with a heaping dash of sponsor promotion. Any company can buy a positive review on financial television or get one of its people on the show as a guest analyst. Change the channel. If the financial entertainment industry had any worthwhile advice, we’d all be millionaires.
This is a tactical mistake more than a strategic one. Rebalancing is how you position your investments for sudden changes in market dynamics. Rebalancing recognizes that different market sectors perform differently over time. For instance, if you’ve been steadily rebalancing for the last five years, that exercise forced you to sell some of your stocks and buy asset classes like gold and silver, which were getting beaten down by the strong dollar. In the early 2000s it was just the opposite. Gold and silver were moving higher and stocks were lower. Rebalancing would have had you selling some of your bullion in order to buy stocks back in those days.
It’s not easy to do the right thing and it’s rarely intuitive, but stick with a well diversified portfolio and rebalance regularly.