January was a rough start of the year for the stock market with the Dow 30 down 5.5%. The headlines described the month as “brutal” and “horrific.” As an individual investor, this can cause worry as one wonders, “Is this the start of the next bear market?”
I recently read a Marketwatch.com article by Mitchell Tuchman which tells investors to ignore the headlines and do nothing at all.
The solution, to cite Vanguard Group founder John Bogle, is to do nothing at all. While that sounds like a weak strategy, it's the only strategy retirement investors should consider.
If you are investing your own money and don't have the training to make the right decisions, I totally agree with John Bogle. You will just be reacting and not making informed decisions. This isn't a good strategy at all.
Is your advisor making the sell decision at the right time?
However, if you paying a professional to manage your money full time whether it is a financial advisor or a broker, don't you think they should be making this type of important decision? Unfortunately I know few, if any, that make this type of call. Many just stay the course and tell you to ride out the storm.
In Tuchman's article, he works out the math if you sell at the wrong time.
If you have $100,000 and the market makes a 10% correction, your investment is now down to $90,000. You decide to sell. Question: What return do you need to recover?
If you said “10%,” pull out a calculator and try again. You need more, about 11.1% or so, to get back to even — if you sold the investment. To recover from a 20% loss you need a 25% return. The farther down you cash out, the bigger the gain you need to get it back.
You should definitely pay attention to this math because it does make sense.
But isn't Tuchman missing the bigger point? It isn't the case that you should never sell, but you have to know when to sell. If you protect some or all of your assets before a decline in the stock market, then you won't lose as much and you can buy things back cheaper. This is a win-win and you can be like Warren Buffett who loves to buy when there is blood in the street.
Don't market time but avoid financial hurricanes
Now don't get me wrong. I am not an advocate of market timing. No one can predict every wiggle in the market. It is an impossible task. However, professionals should get the major turns right and that means protecting client assets before the major bear hits. A prudent bear market strategy will not only save you thousands of dollars but also protect you from the health problems that down days can inflict. If you protect any portion of your assets during bear markets, it will reap big rewards to your long term bottom line.
With the severe bear markets of 2000 and 2008 fresh in investors' minds, tactical asset allocation funds have exploded in popularity. These strategies vary greatly in terms of strategy and I would caution potential investors to look for a manager with real results, not simply backtested theory. There are many tactical funds that are totally unproven in bear markets. Be sure to look beyond the glossy marketing materials.
Who is protecting you from a financial hurricane?