Markets are in turmoil and may well be for the foreseeable future. Over the past few weeks, we’ve had the confluence of a burgeoning debt crisis in the Euro region with the impending debt ceiling deadline looming. The deal the President and Congress agreed to was not digested well by global markets or by one of the big three credit ratings agencies S&P – they downgraded the US (It’s About Time) which resulted in mass selloffs in equities Monday (likely to carry through into Tuesday given what we’re seeing in After Hours and Asia). I’m hearing from various friends, family and web followers about how they’re in despair over these market moves and they’re starting to panic – and lose sleep over the situation.
I’m not going to beguile you with tales of how I’m making money in any market and how I can predict the future. Nor do you want to hear, “Just hang in there, everything will be alright”… because it may not. This market may suck for years. However, I can say with assurance that I’m not distressed over recent paper losses in my accounts. Life’s too short. Here are my thoughts on why you shouldn’t be losing sleep and if you are, what to do about it:
Remember 2008? That wasn’t too long ago. I had a lot of friends around the office who pretty much sold at the bottom. They claimed the stock market was rigged, a Ponzi scheme of epic proportions. By early 2009, when indices were approaching 50% off their prior highs, they unloaded everything – and they were damn proud of it. It was almost a badge of honor around the office as these otherwise rational analytical thinkers were acting on pure emotion and giving a big middle finger to the man (Wall Street). As time passed, we’d have conversations here and there and they steadfastly denied any interest in stocks and were satisfied with the 3% they were getting in CDs with their taxable money and the 3-4% they were earning in bond funds. By 2011, we hit about a 100% gain since the lows. I repeat – stocks just about doubled in 2 years. Low and behold earlier this year, a few of my friends started talking about putting money back into stocks and some of them did just that – right at the recent highs before the most recent decline. They made the classic error in selling low and buying high. I haven’t talked to them yet this week, but I do wonder if they’re ready to sell again after Monday’s losses.
Long-Term Money – I’m close to 100% long equities in my 401(k) which comprises the bulk of my investable assets. Why? I have almost 30 years until I’m gonna see that money – (maybe longer if we live to 150!). Why the heck would I be in the most conservative allocation for money that I won’t touch for an entire generation? History (and logic, and valuations, and fundamentals, etc.) dictate that over a 30 year period, retail investors are best-served in equities over other conventional asset classes, especially in what I predict will be an era of increasing inflation, which should destroy bonds and cash completely. At least US corporations have repaired their balance sheets and are sitting on record hoards of cash (much more than can be said of the US government with Treasury bonds as the proxy). So, yes, for the heck of it, I checked out my 401(k) balance today and it is off quite a bit from the peak a few weeks ago. But it didn’t hurt to look at. It’s still a nice large number and it’s going to be a nicer, larger number in retirement. I have no plans for changing my allocation, nor am I stressed about that balance at this stage in my life. I just focus on diversiviation, low fees (including keeping ADR fees low) and not reacting emotionally to near-term market gyrations.
Life is Too Short – If the thought of market volatility and fluctuations just causes you too much stress, then you should accept less risk. Obviously, your risk tolerance dictates that being heavily invested in stocks isn’t for you. You may well pay for it in the long-run with low returns, and possibly even losing money to inflation in cash and bonds (see how to account for inflation in your retirement assumptions), but is that the worst thing in the world? It beats an ulcer. You need to do one of two things – either get over your fear of loss – or be willing to accept lower returns. But you can’t have it both ways. You can’t achieve high “real” returns with low risk. The world doesn’t work that way.
So, in closing, I’m not gloating over some options plays and my volatility play that have helped mute my losses this week (investment details here). I’m losing money in both my trading account and my retirement accounts. Well, at least my kids’ 529 Plans are making 6% a year because college tuition is outta control! But my net worth declining 5 figures a day, I’m not losing sleep. I have a strategy and time on my side.
Are You Losing Sleep Over the Recent Market Panic?