In 2010 I was an Emergency Medical Services Pilot flying for a Texas company. Between Medical Missions I had the chance to discuss Finance with our Flight Nurses and Paramedics. One Flight Nurse who had a successful side business told me he wished that the Stock Market would Always Go Up. I used the opportunity to explain to him why Most Retirement Savers should hope for a Big Stock Market Decline.
Why Most Investors Get it Wrong
The Best Way to Make Money in Investing is to buy Stocks and Bonds at Low Prices and to Sell them at High Prices…But, most Investors do the Opposite…They Buy High and Sell Low. Why is that? Because, they Buy and Sell at the Wrong Time!
What did You do during the last Bear Market? Did you Panic and Sell your Investments for Less than You Paid for Them? Did You Hold On to What you Had? Did You Buy More Because Everything Was On Sale?
What You Did Last Time is a Good Predictor of What You Will Do Next Time. If You Sold in a Panic…Don’t Feel Bad…You Had a Lot of Company! After All, It’s No Fun to Say Goodbye to a Large Chunk of Money You Used to Own…
The Problem was You Misjudged Your Risk Tolerance. Like my Flight Nurse Friend, You Thought the Stock Market Would Rise Forever. You Did Not Realize that Losing Money Hurt So Much. You Did Not Think the Mix of Fear and Pain Would Convince You to Sell Your Investments After Your 401k Became a 201k.
How to Get it Right
Most Investors Overestimate their Risk Tolerance. How Much Money would you Feel Comfortable Losing if Your Retirement Investments had a Bad Series of Years? When Will You Need the Money? Do You have Other Assets or Income, like Social Security? Here are some Suggestions to Help Figure out Your Risk Tolerance.
1. Take a Test – Vanguard has a Free online Risk Tolerance Questionnaire. Fill it out Honestly. Have Someone You Trust Review Your Answers.
2. Talk to a Fiduciary – A Fiduciary is a Person Who is Required by Law or Regulation to Put Your Needs Before Their Own. A CFP® Professional or Registered investment Advisor can Help You determine Your Risk Tolerance. Most Stockbrokers and Insurance Agents are Not Required to Act as Fiduciaries.
3. Think About Last Time – Did you Panic Sell Your Investments during the last Recession? If so, It’s Time to Become More Conservative with Your Asset Allocation.
4. Get Some Sleep – Your Investments should not keep you Awake at Night…If they do, You Need to Reassess Your Risk Tolerance.
What if You have Never Experienced a Big Market Decline? Then, You should Tilt Toward the Conservative Side when setting up Your Asset Allocation. Short-Term Losses can Scare an Inexperienced Investor Out of the Market.
As Mark Twain said, “The Cat, having sat upon a hot stove lid, will not sit upon a hot stove lid again. But, he won’t sit upon a cold stove lid, either.”
I Watched a Relative Lose a Fortune on “Black Monday” October 19, 1987 when the Dow Jones Industrial Average had its Largest One-Day Decline in History. My Relative Sold his Investment Portfolio and Locked in His Losses. He Missed Out on the Stock Markets’ Quick Rebound Later that Year. It was Decades before he Invested in Financial Markets Again.
What About Retirees?
Even for Retirees, Short-Term Corrections would only be Painful if they were Forced to Sell Part of their Investments to cover Expenses. Retirees should keep enough Cash to Cover at least a Year’s Worth of Expenses so they Won’t have to sell Assets in a Declining Market.
The Key is to keep some “Dry Powder” to allow You to Profit Next Time Stocks Go On Sale. It takes Courage to Buy Equities when Everyone Else is Selling Them…But, That is How You Buy Low and Sell High!
“Look at Market Fluctuations as Your Friend rather than Your Enemy…Profit from Folly, Rather than Participate in it.” Warren Buffett
So, What Do You Think? Have you Sold Investments Because of Fear? Have You had the Courage to Buy when Everyone Else was Selling? Do You Have some “Dry Powder?”