As we write, the Dow and S&P 500 are down about 7% and the NASDAQ is down 10% in 2016. As the TV networks, social media, and newspapers are hyper focused on this drop, many investors are rightfully scared. Many of our clients are retired and living on fixed incomes and depend on their investments not only to supplement their income but also to last for their lifetimes. We KNOW that for most investors it is discomforting to enter 2016 this way, especially in light of the relatively flat returns of 2014 and 2015. So what is an investor to do during times like this?
We suspect that many readers have already prepared for times like this. If you own mutual funds, your money is likely spread out over hundreds of different securities. You hopefully have many asset classes (i.e. stocks, bonds, commodities) and many styles and sectors within those asset classes (large and small companies, domestic and international companies) in your portfolio. And probably most important, you have chosen the appropriate asset allocation based on your stage of life and your financial goals.
When we go through periods like this, where markets seem to drop almost daily, we sometimes feel the need to ‘do something’. It can seem almost ridiculous not to get out of the market at times like this. While this strategy may assuage our fears, history shows that it is not a wise move. We saw clients do this (liquidate their portfolio into a market decline) after the October, 1987 drop and more recently after the 2008 drop. We cannot cite a single case where the client came out ahead of those who didn’t sell. Getting out of the market means choosing the right time to get back in to the market which is really a guessing game. We agree with the time tested philosophy, that it is “time ‘in’ the market, not time’ing’ the market” that will produce successful results.
We say all this with the recognition that this type of market is of great concern to many of our readers. Many are not in a position to recreate their savings. Our counsel to you now is to resist the urge ‘do something’ and rest on the time tested investment strategies of diversification, asset allocation and not trying to time the market.