Sometimes, the Best Advice Is ‘Do Nothing’
This article was originally published on this site
Think back to the 2016 U.S. presidential election, when markets tanked overnight as Donald Trump’s victory shocked investors. The next day in the gray and the rain, anxious traders at the New York Stock Exchange rushed to the exchange floor for what they expected to be a foreboding day.
But surprise! After a deep overnight tip in the overnight markets, Wall Street rallied and even managed to finish in the black for the day. Anyone who sold off as election results came in likely lost money.
“I had angry, scared clients calling me up the day after the election who wanted to move everything to cash,” says Rebecca L. Kennedy, founder and principal at Kennedy Financial Planning. “I advised them to stay put – and thankfully so, given the market run we’ve experienced since then.”
The market’s roller-coaster ride that day is instructive in how investors should behave when markets are in tumult. Most often, the best thing is to do nothing. Don’t bail on stocks, don’t panic and don’t believe the world is coming to an end.
Since the swoon, the Standard & Poor’s 500 index has provided gains (not including dividends) of around 12 percent through late June. Those are gains that anyone who dumps stocks would have forfeited.
“Who knows what may come during Trump’s administration?” Kennedy says. “But one thing is for sure – your portfolio likely has a longer time horizon than his reign in office.”
The stock plunge wasn’t the first time markets have dropped because of unexpected news, and it won’t be the last. The real question is how you, as an investor, will react.
“Your gut reaction is to sell,” says Richard Rosso, director of financial planning at Clarity Financial in Houston. “That is probably because you don’t have your allocation set correctly.”
If a sudden and steep drop in stock prices makes you alarmed, then you probably have too high of an allocation to stocks. That’s easily remedied by selling some of your stocks and buying some bonds. This should be done when markets are doing well, not when they are tanking.
Other reasons to do nothing. Index investing, or buying a broad basket of stocks and holding it for a long period, is competitive for two reasons, says Scott Clemons, chief investment strategist at Brown Brothers Harriman in New York.
First, index funds carry low fees for a diversified portfolio. And second, index investors avoid the trap that investors of individual stocks fall into, when “you have to get two things right,” Clemons says. Those investors have to time the decision to sell correctly, and time the decision to buy correctly in order to make any money. And that’s hard to do.
“Falling short on either one of those will cost you,” he says.
What to do with your portfolio. When it comes to most hard things in life we are taught to do something to make it better. Not necessarily so in this case. The right thing to do is often opposite of what we were taught for almost everything else.
“Don’t just do something,” Clemons says. “Stand there.”
The first thing on the to-do list is simple: Stop checking on your investments frequently. Clemons says he checks his portfolio twice every 12 months: once at about this time of year, and once in January. And this is a man who is the chief strategist for one of the world’s most storied banks.
Part of not checking on the performance of your portfolio frequently is to keep it away from your mind. It is natural to want to tinker with it, and more so when things aren’t performing well. But most investors have a very long-term time horizon for when they need their money.
Consider the SPDR S&P 500 exchange-traded fund (ticker: SPY), which tracks the S&P 500 for stock exposure, and the Vanguard Total Bond Market ETF (BND), which tracks the broad bond market for fixed income. They have annual expenses of 0.1 percent and 0.05 percent, respectively – or $10 and $5 per $10,000 invested.
If you are quite comfortable with the ups and downs of the stock market, then maybe consider more stocks. If the potential for losses makes you nervous, then have a smaller allocation to stocks.
The third thing to do is to ration how much TV news you watch. What catches the attention of TV producers probably won’t make a whole lot of difference over the decades-long time horizon that most people have for their stocks and bonds. By avoiding TV news you won’t get so anxious either.
When you combine the ideas (don’t keep checking, set up a balanced portfolio of assets, and don’t get riled by TV news) then you can “set it and forget it.” You can leave your portfolio alone, save checking in on it occasionally.
