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Friday, March 11, 2011

Earthquakes, European Debt Issues, Middle East Craziness...

Spooky Forest
 Earthquakes, European debt issues, Middle East craziness, State & Local government deficits ...

What is your asset allocation? How is your portfolio doing in the market downturn? How will further market deterioration affect you? As I've detailed in previous posts, if you are with Schwab, you can hit a button right now and get an up-to-date performance. You know exactly what your allocation is and how each asset class is performing. This is always valuable information but especially in markets like these. Forget waiting for the quarterly statement--the information is at your fingertips.

If you don't know the answers to these kinds of questions, today's markets  can make you feel like you are in a horror movie, walking in the spooky forest. You'll jump at every unusual sound as the rain falls and the wind howls.

Furthermore, you may not realize it, but you are even more on edge than usual after the horrific experience of 2008 and early 2009. The behavioral scientists tell us that recent experience carries a great weight in our minds. No wonder people are hyper-ventilating.

How to proceed? First off, if you can answer the questions above, you are ahead of the game--especially compared to those whose assets are scattered, who buy and sell on an ad-hoc basis, and who jumped in late after the market had made most of its move. Many of these people are berating themselves with the old "I knew this was a trap" mind speech and are totally confused today on what to do next.

Secondly, remind yourself of your situation. You are either accumulating assets or are in the decumulation stage. The accumulator welcomes these markets because he or she can buy more stock for a given amount as stock prices drop. This is called dollar cost averaging. They buy today at lower prices and care about where the market is 10 or 15 years from now or whenever it is when they plan to draw down their nest egg.

A little knowledge of market history goes a long way in these types of environments. Many examples of previous sharp downturns exist - all with the same message:  panicking is a bad strategy.

The decumulators, those drawing down their nest eggs, are in a different boat. They should have a plan in place to handle market downturns. The plan typically has set aside months of payments so that they don't have to liquidate stocks at unfavorable prices. Forced liquidation in this market results in what is known as reverse dollar cost averaging, which is harmful to the portfolio. It means that more shares have to be sold to raise a given amount of money. An appropriate decumulator plan will typically have a goodly percentage of fixed income assets - the typical 60-year-old will have approximately 60% of assets in fixed income. Note:  on the big down days in stocks recently, bond prices have risen. This is the cushioning role they play in the portfolio.

So what is the bottom line? Remember it is your money, and it is important to maintain a certain degree of stability. Whatever your plan is, if you are waking in the middle of the night with dreams of oil wells on fire and Europe defaulting, your plan isn't working. Adjustments need to be made.

This, at least, is DIY Investor's view. As Thomas Paine said "These are the times that try men's souls."


  1. Where there's fear and uncertainty, there's a buying opportunity for those that can keep their wits about them.

  2. re:Grouch Agreed. The chance of getting a nice return is greater at lower prices.

  3. These are interesting times, some people are losing money due to panic selling while others have a big smile due to buying securities on sale for the long run...

  4. re: Mich I agree...pick up stocks on sale.

  5. I have a theory. I've coached some people to just rebalance once a year and ignore all investment news. A couple of them have done that, and they don't care to follow the markets. They have much better things to do. But I think they'll beat most sophisticated investors who dance around. I think they'll also beat the vast majority of index investors who dance around (looking for that next, new market ETF with the lower MER, higher diversification etc) I haven't met a dancer who made decent money in the markets over a long period of time. I've tried my hand at stock pocking, and did well for a long time, by buying and mostly holding. But the strange thing is this: when I look back at what I sold, five years ago, I may have been better off with a 0% portfolio turnover than a 5% portfolio turnover. Dancing is a way to lose, unless you're doing it to music and having a great time in some Brazilian bar. But that's not scared dancing, is it? Scared and greedy dancing will just get you into trouble---even in a Brazilian bar.

  6. Re: Andrew Ignoring investment news is key. You are right on. It reminds me of when the baseball players went on strike. All of a sudden people found there were a lot of fun things to do on Saturday afternoons other than stay glued to a TV set watching a ball game. This is brought to mind with the ongoing labor dispute between the NFL owners and players. Some people don't know when they've got the goose that lays the golden eggs.