I met with a gentleman last week who confessed to having made a mistake recently thinking we were in a BEAR market. His story began years ago and took an ugly turn early this past December, just two months ago. Let me set this up for you.
This investor successfully navigated the past 30 years. He did it right – at least for his part. He purchased mutual funds slowly based on a good percentage of his income over time, and he held onto them. Through market turbulence in 1987 and 1990 and then again in 2001 and 2008, he remained invested and did not panic. Not even once. I would have made some corrections to his diversification level based on our academic research and what we know about correlation benefits, but for his part he stayed disciplined through many ups and downs. He was vigilant about it.
As a result, two things happened that he had not fully prepared for mentally. Listen carefully. These will likely happen for you too.
First, he entered his late 50s. Who would have thought? – he got older. For the first time in his life, he is within a decade of retirement and without realizing it, he had been spending more time thinking about his next phase. This was in part subconscious and in part very conscious. He was moving on in his mind.
Secondly, and this is partly what caused him to think about his future more and more, his investment balances began to reach new highs. These highs are the ones he had been planning for but had not heretofore achieved. Since he had not panicked in 2008, he was able to watch all of the value come back into his accounts and then some since then.
For the first time he did some math on these new numbers. IF his balance took the same hit now percentage-wise that it did in 2008, what would be the total loss to him in dollars? That was a number too large for him to handle.
So far, nothing in this story is out of step with what a prudent investor would do. You want to know yourself. You want to know the purpose for your money and you want to know when to make a change. That is all well and good.
This investor, however, un-coached and unaware of the power and methods of diversification, called his broker and moved 100% to cash. He took the whole thing out of the market.
Now, you are likely saying to yourself at this point “He was right! He just saved himself a nearly 8% loss given the market drop in January!” And you’d be half right. Yes, he saved himself a small correction two months ago, true. But he is now faced with another problem, an even more difficult question: “When (and how) do I get back in?”
We all know by now that savings accounts don’t keep up even with inflation. So the money will lose value in buying power if he leaves it there. And yet, the market is volatile and could go down even further if he puts it back in. But if he leaves it out, the market increases can come at any moment and without warning so he will eventually lose value over time for sure. What to do?
You may be in a similar situation to the gentleman in my story. If so, there are answers that have data to support them. Diversification that uses the right mix of short-term high quality bonds and retains a prudent amount of equities is available and can be explained simply and put into effect in your portfolio in a slow systematic fashion.
Our event on April 22nd will touch on this. I hope to see you there!