The excitement! The Dow drops 1,000 points in an hour. Market volatility is back. How fortunate the "experts" (few of whom predicted any of this) are here to counsel us.
And what an abundance of advice from which you can choose: You should buy gold. Understand the bull market is over. The financial crisis is spreading worldwide. U.S. default is imminent. Flee to safety (when did we hear that one before?).
An Investors Business Daily article opined that "when the market struggles, stock investors don't have much recourse but to cut their exposure to stocks."
My personal favorite are the columns telling you which stocks won't be affected and now represent "buying opportunities". When the markets were going up, I didn't see advice about which stocks should be sold "now" since the run-up represented a "selling opportunity."
Can you sense the urgency? Obviously, you must do something now! There's no time to lose.
Back to the Basics
This is all errant nonsense, which is not surprising given the dubious qualifications of the "experts" dispensing this advice.
If you really need to take action "now", it's because your trusted broker or adviser has you in a portfolio that's not suitable for your risk tolerance and investment objectives. If you're in a suitable portfolio, you should take a cue from iconic television show Seinfeld and do nothing.
Let's go back to basics. They're boring, unlike the shrill voices trying to figure out market volatility and so confidently predicting the unpredictable.
If you'll need 20% or more of your invested assets in less than five years, you should have no exposure to the stock market. Your assets should be 100% in Federal Deposit Insurance Corporation-insured certificates of deposit, Treasury bills or money market funds from well-established fund families like Vanguard, Fidelity and Charles Schwab.
Those with longer time horizons should have an appropriate exposure to stocks, with the balance of their portfolios in short- or intermediate-term, low-cost bond index funds.
Investors in these portfolios don't need to panic when the market has a hissy fit. They can hold on to their stocks (which are in low-cost stock index funds) until the markets recover -- which 80 years of historical data tells us will happen.
The advice filling up the Internet and TV channels is worse than inaccurate. It's extremely harmful to your financial wellbeing. Bouncing in and out of the market in response to market volatility practically insures you're selling at the wrong time and will pay the price for this activity.
Trying to pick stocks is even worse. As respected financial author William Bernstein notes: "It turns out for all practical purposes there's no such thing as stock-picking skill." Holding individual stocks increases your risk, while providing you with the same expected return as holding the index to which that stock belongs. More risk. Same expected return. Does that sound like a good deal to you?
As you confront the current market volatility, you have two choices: Listen to the same discredited advice that failed to predict the crash of 2008, the recovery in 2009 and the current market decline. Or treat these pundits as emperors with no clothes, trumpeting a skill set that doesn't exist to gullible investors who want to believe it does.
If you must "do something now", I have a suggestion for you: Fire the broker or adviser who told you they can beat the markets (they like to refer to this non-existent skill as "adding alpha") and who has your money invested in anything other than a globally diversified portfolio of low-cost stock and bond index funds in an asset allocation suitable for you.
That's action worth taking "now."
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