Scary market, yes, but keep cool, investors

 

SCARY MARKET - YES - BUT KEEP COOL INVESTORS

 

 

Robert Powell, Special to USA TODAY 8:42 p.m. CDT August 21, 2015

 

 

Don't panic. Yes, the stock market is in a free fall with no end in sight.

But now would not be the time to head for the exit doors, say experts.

"Regular folks should take on a long-term view and avoid trying to anticipate short-term market movements," says Stephen Horan, the managing director of credentialing at CFA Institute in Charlottesville, Va. 

"There is almost no evidence to suggest that professionals can do it effectively and a plethora of evidence suggesting individuals do it poorly."

Now would, however, be the time to re-evaluate your current asset allocation – what percent of your money is invested in stocks, bonds, and cash – against the asset allocation you deemed appropriate when you created your investment policy statement.

If it's out of whack, then and only then, might you consider selling and buying. Otherwise, now would be a good time to do nothing, unless of course you don't have an investment policy statement – a blueprint – for your investments.

An investment policy statement (what advisers often call an IPS) is a document that reflects your investment goals, your time horizon, and your tolerance for risk. Done right, an IPS will spell out how much you should invest in stocks, bonds, and cash as well as when to make changes to your asset allocation.

According to Horan, an investment policy statement, developed best case with the help of a qualified adviser, guides investment decision-making in both rising, quiet, and falling markets. "It serves as a steady hand at the tiller," he says. 

"The policy statement can change periodically in response to changes in financial position or other life circumstances, but it generally shouldn't change much as a result of large market movements. Market swings are generally an impetus to rebalance based on allocations and strategy laid out in the policy statement."

Of course, you might be inclined – especially if you have little experience with the stock and bond markets – to use market swings such as that which occurred last week as an impetus to revise your policy statement. But Horan discourages that "because it's often an excuse to overly reactive."

Others, meanwhile, say now would be a good time to review a few things and make adjustments if need be. "Absolutely, don't panic into emotionally-driven mistakes, but don't ignore what's going on around you," says John Nersesian, a managing director with Nuveen Investments in Chicago. "Moments like these are a great chance to review a few things."

What should you review and act on? In short, the specifics of your investment policy statement.
What's your horizon? "If you're (investing in the stock market) to pay a tuition bill next month or to fund a vacation next year, the decline is a problem," says Nersesian. "If you're funding retirement in 10 or 20 years, declines like this provide an opportunity to put money to work at lower levels."

What's your allocation? "If you were overly concentrated in an asset class such as emerging markets or a market sector such as high-multiple biotech, the decline was sharp and severe," says Nersesian. 

"If your allocation is well diversified to include utilities, high-quality fixed-income, real estate investment trusts and the like your volatility was more muted."

What's your risk tolerance? Determine how much volatility you can withstand financially and emotionally. Put another way: How much capital you can afford to lose and how much sleep can you can afford to lose? 

"Make sure your allocation and holdings reflect your ability to withstand these risks," says Nersesian. "Remember, volatility is the price we pay to earn higher returns."

What's your perspective? Although the market is down 10% from recent highs and down 5.7% over six months, it is unchanged over the past 12 months, up 41.1% over the past three years and up 84.4% over the past five years, says Nersesian.

How are you saving and investing? Consider using different pots (and different types of investments) to save for different types of goals. For short-term goals, say a down payment on a house, use the least volatile investments such as money market mutual funds, certificates of deposit, and short-term bond funds or ETFs. For long-term goals, say a retirement 20-30 years away, create a portfolio of stocks and bonds. 

Over the course of time, a portfolio of large-cap stocks and long-term bonds will rise and fall. But a 50% stock/50% bond portfolio has returned at least 8% per year since 1926, according to calculations based on data in the Ibbotson SBBI 2015 Classic Yearbook.

Robert Powell is editor of Retirement Weekly, contributes regularly to USA TODAY, The Wall Street Journal and MarketWatch. Got questions about money? Email Bob at rpowell@allthingsretirement.com.

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