2009 has already given us a lot to think about. I have had some very interesting conversations with clients, readers, and friends about what to do now. Here are a few things to think about:
- No one knew this was coming. I know that there are all sorts of folks claiming to have known, but really, no one knew. It has been one surprise after another. It might seem obvious now, but that is only with the benefit of hindsight.
- The past is the past. It does no good to worry about mistakes that might have been made. What is important is what we do from here. It does not matter what your net worth was or what your portfolio was worth. The only thing that matters is making the best decision you can with the information you have NOW.
- It is perfectly normal to feel scared. In fact, when you open your monthly statement and see another large loss, you process that experience in the same part of the brain as you would if you were watching a rattlesnake slither across your living room. We are hard wired to run from things that cause us pain and to try for more of the things that give us safety.
- If you are not invested like an adult (super diversified & low cost), now is a great time to make the change.
- Focus on what you can control. Take a hard look at expenses, consolidate accounts, or rebalance your portfolio. Doing the things that you can control has a way of making you feel better.
- Make sure you have a financial plan that provides context for the really tough decisions you are making right now. I am not sure how you can make investment decisions without one. In fact, everything else I have to say assumes that you have a plan and you are investing like an adult (see #3).
- Question: do you think stocks will outperform cash and bonds for the next 10 years? If you invested in a broad-based index fund for example, and then turned the “stock market” off for 10 years do you think that you would have more money than you would if you hang out in cash or CDs? In terms of expected future returns, didn’t they just go up because values have come down so much?
- Cash is not a good long-term investment. At current rates, it is costing you to own money market funds after taxes and inflation. The only reason to have long-term money in cash is fear. Fear that FROM HERE you will lose less in cash over the next 5-10 years than in stocks.
- If you are super diversified, you are investing in the concept of capitalism. Capitalism might be broken, but I don’t think it is the end. (If it is, we will all be moving to the hills to grow our own vegetables.) One of the basic tenets of capitalism is that you get rewarded for taking responsible risks. Risk and reward are related. Owning equities is more risky than owning bonds. Owning bonds is more risky than owning cash.
- Selling might be the right thing if you just can’t take it anymore. We might see the Dow hit 6,000 before it hits 10,000 again. Who knows.
- If you decide to sell, make it a permanent decision. Don’t sell thinking that you will get back in when this all blows over. First of all, they do not ring a bell when we have hit bottom. Second, if you are selling to relieve worry, you have jumped out of the pan and into the fire. Instead of worrying about your portfolio going down, you have to worry about missing the chance to get back in. If you sell now, decide to never buy back in.
- If you decide to stay put in your super diversified portfolio, write yourself a note today and open it in five years. Write down how much you disliked the experience you are living through, how much you wished you had not taken so much risk, and how you wished that you were more conservative. I am sure that when everything is rosy again, we will forget the lessons of this scary market. When CNBC is happy again, and all is well in the world, the last thing you will want to do is be more conservative. Maybe this letter to yourself will remind you to “…be fearful when everyone else is being greedy.” Can you imagine what you would have said if someone told you to become more conservative in late 1999? We forget so quickly that this little letter will help you remember.
- Most of the things we are all worried about are not problems now. I mean right now. The fact that your portfolio is down is not a problem today. For the most part, we are worried about what “might” happen years in the future. Maybe it would help to spend the time to create a plan for the future, make sure your investments are efficient, and then focus on the present. I know it is easier said than done, but it is all we can do now.
- Even in the face of mounting evidence, the prudent thing to do, in fact the only thing to do, is to be optimistic. Optimism has been the only realism in this great country of ours. It has never been correct to assume that we will not get through an economic challenge. Not once. Every recession we have ever had has ended. Every scary market has ended. To assume otherwise this time would be to ignore the weighty evidence of history.
This is not meant as a comprehensive list.
This should not replace working with a trusted advisor to apply these things to your unique circumstances.
It is my simple way of starting a conversation.