Fix a window….Fix your portfolio By Christina Mae Olson, CFP®
As you can imagine, I have been fielding many calls from worried investors. It has been a very busy year for this independent financial planner. The concern most articulated is about decreasing values in brokerage accounts, IRA’s and retirement funds. Are brokers managing their money properly? Are their accounts well diversified? Is it time to take everything out and put it in cash? Cut the losses now before things get even worse?
Let me put this “crisis” in our stock market into some perspective. After 9/11/01 – the Dow Jones Industrial Average (The Dow) traded at 8920. It skidded to a low of 7405 in October of 2002 before shooting up to 14,666 in October 2007. This index of blue chip US stocks doubled in value in just 5 short years – amidst a climate of horrible, global terrorism and war. What goes down, in this case, will come up again. The particular set of circumstances which has fueled the current sell-off/downturn will settle down. Much of the selling has been due to over reaction (some say panic) and unrealistic fear. The presidential campaign is a huge factor. Companies are inappropriately undervalued now. The worst thing you can do is to sell out at the lowest value we’ve seen since 9/11/01! Do not sell out and liquidate your accounts unless you need your money now. Your retirement account losses are only “paper” losses. You won’t actually take the loss until you take the money out or exchange your stock fund shares for cash. Don’t do it.
In mid-October of 2008, just a few short weeks ago, The Dow traded below 8000 again. Never mind it is up over 9000 as I write this article on 10/29/08. Up and down. Down and up. My point is that the stock market will fluctuate. It has recently experienced down/losing days that were more dramatic than those of the Great Depression. It has also experienced up/gaining days that were the highest ever recorded. I can’t say these extreme gyrations are “normal” but it it’s fair to say that it’s quite normal and even expected for the market to experience fluctuations. Keep your money in the market – you don’t want to miss out on the rebound when it happens. I firmly believe it will happen.
What to do? Well, just like owning a car – you have to be diligent about taking care of your portfolio. You don’t ignore the “engine oil” light when you see it on your dash. These problems don’t just go away without some sort of action on your part. Do you manage your own portfolio? Do you have a self-directed IRA? Are you contributing to your employer’s 401k or 403b plan? You are, in reality, servicing your own portfolio unless you pay a broker to do it for you. You don’t wait for the “engine oil” light to change your oil. It would be too late by then. You shouldn’t wait to adjust/service your portfolio, either. Even if you have a broker – you should still follow some simple guidelines:
Pay attention.
Do not ignore your account statements. You need to know what is going on with your money. It is, after all, your money. For some people, this is your largest financial asset. You fix a broken window in your house, don’t you? Why wouldn’t you tend to and fix your portfolio? It won’t take care of itself.
Don’t pay too much attention.
Don’t agonize daily over the losses/gains in your accounts. Monthly or quarterly is frequent enough. Yearly is too long to wait, however, to see what is going on.
Diversify according to your risk level.
The very best “fix” for a suffering portfolio is to make sure you are well diversified. You should have an asset allocation that corresponds with your “risk tolerance.” Huh, you say? Learn about this. Most people who are panicking now never did a risk profile. Of course you wanted your investments to go up (happy with that) but didn’t consider how you’d feel when they went down (oh, unhappy there). Every bank and credit union, mutual fund company and brokerage house has free tools for you to determine what your true risk profile is. Take the time to determine your risk profile.
Rebalance your portfolio periodically.
Keep your asset allocation up to date. If you started out with an 80% stock/20% bond mix then you need to keep it that way. The stock portion of your portfolio should be allocated across a few asset classes (big cap, small cap, international, etc.). When your mix gravitates to 50% stocks and 50% bonds – then, by all means, sell some bonds and buy some stocks to bring it back to 80%/20%. You’ll be selling your bonds high and buying your stocks low. That’s the idea. The last thing you should be doing is selling low. Be careful about owning individual stocks. Stock mutual funds are much more diversified than individual stocks. If one particular stock goes belly up (Lehman Brothers?) then your fund has dozens or hundreds of other companies to insulate you from that loss.
Adjust your lifestyle accordingly.
You need to keep an eye on your saving and spending habits when your investments are experiencing a down period. By all means, keep contributing to your retirement accounts. Don’t accumulate new debt. Pay off your credit cards each month. Spend less this month than you did last month. If you have to wait a little longer before taking money out of your investments (sell high, remember?) then you need to know you can live on a little less. The less you spend on your lifestyle – the longer you can wait to tap into your investments.
Chris Olson is a certified financial planner™ with a fee-only practice. You can reach her at CMOney@centurytel.net or (608)-525-9818.