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A lot of people develop deep feelings when it comes to the stock market. They get emotionally hooked on stocks, “stories” about companies and even the market’s future.
Most times, this relationship ends badly. Although the market represents the “animal spirits” of millions of investors, it doesn’t single out your feelings. It has no regard for what you think or do.
That’s why it’s always time to be cautious because you need to look at risk. Bull markets don’t last forever and you need to be vigilant. Here are five things the market doesn’t care about:
— Whether you think it’s high or low. By historical standards, what investors are willing to pay for shares is high. The Shiller P/E Ratio, a benchmark for market valuation, is hovering around 38. It was around 44 during the height of the dot.com bubble and 27 in 2007 (before the credit bubble crash).
Of course, most people “feel” that it’s the right time to invest — or pull out. Since no one knows when the market will peak or trough, it’s best to ignore those feelings. Keep on investing during good times and bad.
— Market Predictions Say The Market Will Rise — Or Drop. Every day, market pundits have a 50/50 chance of being right. It’s a coin toss.
No one is reliably accurate on market tops or bottoms. If they make a right call, they usually look backward and say they were right. That’s not a prediction. It’s luck. Ignore soothsayers. They are wrong most of the time.
— When You Should Start Saving. This decision will drive you crazy. There is no wrong time to save. The best time to save — no matter what your age? Now.
— How Complex Your Investments Are. If there’s one rule to investing, it’s this: The more complexity in an investment vehicle, the more it will cost you.
You may never come out ahead on these investments, so avoid them. Keep a simple portfolio of index funds of global stocks and bonds. That’s the best way to tap market returns from across the world.
— Politics and the Economy. The market doesn’t care who you voted for for president. And the person in the White House — no matter how odious — has little or no impact on the economy or markets.
Whether or not there’s a “Trump” rally continuing or ending shouldn’t occupy your time and energy. What matters are interest rates, inflation and the health of the global economy. If any one of these elements turns against you, you might need to make some changes. But in most cases, just sticking to your savings plan is the best course.
What can you do? At the very least, take a look at your portfolio. You can use Morningstar’s Portfolio X-Ray Tool to take a close look at how much risk you’re taking.
Do you have more than 20% of your portfolio in one stock? Then you may be overconcentrated. You also shouldn’t have most of your money in bonds or all of your money in stocks.
In investing, balance is protection. Make sure your portfolio mix is right for your age and risk tolerance. It shouldn’t be an emotional matter. It’s simple math.