When people find out that I know quite a bit about investing, they inevitably come to me during times like last week and ask me whether I think we’re heading into a bear market, or ask equivalent questions like whether they should invest now or wait, or if they should sell stocks and raise cash, or whether we’re near a bottom and they should buy. I’ll usually say, “I have no idea, and it really doesn’t matter.”
Let me ask an equivalent question: If you live on the coast, do you think there will be a hurricane this year that will damage your home? Should I buy a home on the coast this year, or maybe wait a year or two? If I own a home on the coast, should I sell?
You could look at weather patterns over the last few years. You could look at trends for sea temperatures and conclude that chances are better or worse than usual. You could look at how long it has been since a hurricane hit your area and think that maybe you’re about due.
In the end, however, it really wouldn’t matter. Even if you thought that the chances are high that there would be a category five coming through town in October, you wouldn’t sell your home and move away for the year, figuring that you would then come in after a hurricane hit, buy back the land under the pile of rubble that was your home, and build again bigger and better. You also wouldn’t cancel your homeowner’s insurance just because you figured that the chances are low this year. You know that hurricanes will come some years, so you plan and take appropriate precautions. You also know that they are somewhat rare, so you don’t stop living your life out of fear.
The same is true of investing. You take risks that are appropriate for your situation in order to do the best you can while still having the protection you need. If you have money that you plan to use to retire in 40 years, you don’t sell out and go into cash today just because there may be a bear market this year. If there is, you can just ride it out, maybe buy more shares during the decline on the cheap, and then wait for things to recover. In 40 years, that bear market will be a blip on a graph. If you miss a big run up, however, because your cash was stuffed in your mattress, you could be looking at a lot less money at retirement.
Likewise, if you are five years away from retirement, you don’t decide that this is the time to juice your returns by writing naked put options. You put the money you’ll need the first year or two into a safe place, adjust your other holdings as appropriate to when you’ll need the money and how much risk you can afford to take, then go on living your life. The state of the market, and whether people think it will go up or down, shouldn’t have any bearing on your financial plan.
So, plan for the hurricane, make sure you’re insurance is paid up and you have food for a week stored away, then go on with life. People who spend a lot of time changing their portfolios because of what the talking heads on CNBC or the guy at the water cooler is saying make returns way below what they would have made if they had just left things alone. It is the lazy person who does well when investing. Be lazy.
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Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.