You can’t predict your portfolio’s future—so do this instead
“Trying to predict the future is like trying to drive down a country road at night with no lights while looking out the back window.” — Peter Drucker
It’s easy to predict which way the market will move, correct? I have been inundated with client emails with doomsday articles on how the stock market is about to crash. After all, the market has risen for five years in a row, so it MUST be time for a crash.
Are you ready for the next big stock market move, either up or down? We all hear stories about how so-and-so knew that the market was about to crash and sold off his entire portfolio, or another who knew exactly when the market had reached its low and invested everything he had and became a multimilliionaire. Sounds easy, right? Wrong! If it was so easy to predict a market crash, why have the doomsayers been consistently wrong in their crash predictions? They have been predicting a crash for three or four years with nothing to show for it.
Easy to predict the future, huh? Look no further than the latest five-day weather forecast to see how difficult it is. Our trusted weathermen, with the most sophisticated scientific instruments at their disposal, can’t tell us what the weather will be two days from now.
Investors should draw on past experience and history, and learn from it and try to create a plan based on current similarities. But don’t rely 100% on those similarities; rather, use history as guide and plan accordingly. With a little perspective, you can avoid mistakes many investors make in both rising and falling markets.
Define your goals
Investors should sit down with a pencil and paper and start to define long-term goals. Be specific. This will impact your saving and investing goals as well. After defining your goals, you need to invest your money in a way that will enable you to achieve the aforementioned goals.
Review how your assets are allocated—how your assets are broken up among assets such as international stocks, real estate, large-cap stocks, small-cap stocks, bonds or cash—and make sure you have a well-diversified portfolio. If you have defined your goals, understand why you have chosen certain investments, and diversified appropriately, you will be able to avoid common mistakes made during volatile markets.
Nothing goes up in a straight line
Investors often think that nothing needs to be done to their portfolios when markets are rising and their portfolio value is rising as well. Unfortunately, even in rising markets mistakes can be made. It’s important to remember that markets don’t always move up, and that they can drop as well. For younger investors, market gyrations are less problematic. For retirees or those fast approaching retirement, the need to preserve your capital becomes much more important. Chances are that once you hit retirement, what you managed to save is what you will have to live off (in addition to pension moneys and Social Security), and having a portfolio that is overly aggressive can blow up in your face if the market gets slammed.
Don’t forget about your asset allocation. The recent market upswing has been driven by certain segments of the market, such as tech stocks and dividend-paying stocks. Make sure that your portfolio stays in balance. For example if you had 5% exposure to technology, and now after the run-up you have 10% exposure, you need to pare back on your holding.
When the market is strong, some investors lose sight of their long-term goals and focus just on how much they’re making in the short run. But if you start focusing on the short term, you might take on more risk than you should.
Be patient. It helps to remember the most important rule of investing for retirement: You’re investing for the long term, not to get rich tomorrow.
