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The headlines are frequent and give a scare to investors who take a glass-half-full-view of the stock market.
- “Black Monday Is Coming Again,” warns the Daily Express.
- “Investors, This Is Your Last Warning About the U.S. Stock Market,” cautions MarketWatch.
- “Crash Fears Escalate As Markets Hit Highs Not Seen Since Black Tuesday and Dot-Com Disaster,” moans the Daily Telegraph.
Should you sell your stocks when the pundits say a crash is looming?
Probably not. Trying to time when a market will crash is brutally hard. As the old saying goes, to successfully time the market you have to be correct twice – once when you are buying stock and again while you are selling. Chances are you’ll miss at least once.
“The world’s smallest party is that held for successful market timers,” says Tony Cousins, CEO and chief investment officer at Pyrford International, which is part of the BMO Financial Group.
“On virtually any metric equity markets are very overvalued,” he says. “That said, valuation metrics are not good indicators of market timing and it is certainly possible for markets to get more overvalued.”
Instead, you might want to ride out swings in the market.
“Market calls, top or bottom, are as accurate and credible as shaking a Magic 8 Ball,” says Richard Rosso, director of financial planning at Clarity Financial in Houston. “Right now there are too many expecting the great fall in markets. Unfortunately, that’s not how corrections or bear markets begin.”
Here are some tips to help investors ride out market highs and lows:
Recognize the signs of a healthy economy.“The bearishness has been a contrarian indicator so far. So-called value investors have been calling the top in U.S. equities for at least the last four years,” says William Rhind, CEO of ETF firm GraniteShares.
Unemployment has dropped from a high of 10 percent just after the Great Recession to 4.1 percent in November, according to data from the Bureau of Labor Statistics.
Likewise, corporate America is expected to keep earning in spades. Consensus estimates for the Standard & Poor’s 500 index this year will have earnings per share of $131, which will grow to $146 in 2018 and $160 the year after, according to a recent report from Yardeni Research.
“The two Es of ‘earnings’ and ’employment’ provide an incredibly powerful tonic for stock prices,” says Adam Johnson, founder and author of the Bullseye Brief newsletter.
“Pundits love to debate whether stocks are expensive or cheap, pouring over charts and historical data, when all they need to do is look at what happening in front of them,” he says. “And it’s very good.”
Review your holdings. It’s smart to rebalance your portfolio once a year. For instance, over the last year the S&P 500 has surged by around 18 percent, not including dividends. Meanwhile, the bond market has not moved as much at all. For instance, the Vanguard Total Bond Market Index exchange-traded fund (ticker: BND) has gained less than 3 percent, according to Morningstar. It has annual expenses of 0.05 percent or $5 per $10,000 invested.
Given that scenario, your stock-bond portfolio is probably out of balance and you should sell some of your stock allocation and use the proceeds to buy bonds. That will keep you protected should the stock market dip unexpectedly.
“Investors shouldn’t be bullish or bearish or attempt to select tops or bottoms,” Rosso says. “They need to remain grounded in the rules of managing risk though a blended allocation of stocks and bonds and yes, even cash.”
A good starting point for most people is 30 percent in bonds and the rest in stocks and other investments. If a big drop in the market would present a financial problem for you in the immediate future then you may have too big of an allocation to stocks.
In general, the longer the time horizon you have to leave your portfolio invested the more stocks you should have, and vice versa.
Tune out fear-mongering headlines. It’s easy to fall into the trap of reacting to the 24-hour cycle of cable news headlines, whether its talking about the economy, the stock market, global tensions or politics in Washington.
All of that has the potential to affect your portfolio, but reacting to headlines by making a corresponding buy or sale won’t help – in fact, you’re more likely to eat up any profits in transaction fees.
“North Korea isn’t a reason to sell stocks, because if a global nuclear war breaks out, why are you better in cash?” says Don Coxe, chairman of Coxe Advisors in Chicago.
Top Funds to Track Stock Market Volatility
Fund information as of November 21st, 2017