Worried about stocks? Smart investors do these 3 things
NEW YORK (CNNMoney) — Stocks are off to their worst start to a year ever.
No wonder “sell stocks” is a popular Internet search term these days. The phrase just hit its highest search frequency since 2008 (the year of the financial crisis), according to Google Trends statistics compiled by the blog Daily Shot.
It’s human nature to look at this massive wave of selling and panic.
But what’s going on in the markets right now is not a repeat of the 2008 financial crisis and Great Recession.
The global economy is still growing, even if it’s slower than everyone wants. And in the U.S., banks and individuals are carrying a lot less debt, meaning people have more “rainy day” funds on hand if the downturn gets uglier.
The goal for most Americans is to invest for decades, not days. Yes, stocks gyrate up and down, but over every 15-year period since World War II, they have made money for investors, often a lot of money.
The market rewards optimists — and pragmatists.
Intelligent (long-term) investors tend to do three things when markets sour:
1. Don’t panic. Investing is as much about psychology as numbers. Selling out of fear is almost always a mistake.
2. Diversify. The No. 1 investing mistake people make is that they don’t diversify, says Norton Reamer, a veteran asset manager. He founded United Asset Management (which was bought by Old Mutual for over $1 billion) and is the former CEO of Putnam Investments.
“In plain language, diversification means not putting all your eggs in one basket,” says Reamer, author of the forthcoming book “Investment: A History” which looks at 5,000 years of investing history.
Even the Bible and Shakespeare’s plays warn not to put all your money into one asset. Another telling example is 14th-Century Italy. The world remembers the Medici family, but there were two rival Italian banking families in that era: the Bardi and Peruzzi.
The reason few have heard of them is they made big loans to England’s King Edward III and he never paid them back. That one big bet bankrupted those banks.
Investors today are encouraged to diversify among stocks, bonds and real estate.
Consider what’s happening in the market now: stocks and oil prices are tumbling, but government bonds and gold are rising. Investing in a variety of assets should help you lose less money in the downturns but still capture most of the upswings.
3. Rebalance. Good investors have a plan such as investing roughly 70% in stocks and 30% in bonds (here’s CNNMoney’s calculator to figure out the right investment mix for you).
From time to time, they check in to make sure their portfolio is still adhering to the plan. If it’s not, they buy and sell a little to get it back to the target.
But once you have your diversified portfolio, you have to stick to it. That requires annual — or at least occasional — check ups.
“Many portfolios are overweight stocks after seven years of good stock returns,” says Kate Warne, investment strategist at Edward Jones.
She notes that someone who had about 65% of their investment portfolio in stocks in 2009 has close to 80% in stocks today because stocks have gained so much more than bonds in recent years.
That’s a lot more stock exposure — and risk — than they realize.
A quick call to your investment adviser — or simply logging into your account online — should show you a breakdown of how much of your portfolio is in stocks now. It may be a wise time to sell some stocks and get back closer to your long-term target.
Wall Street and independent experts rarely agree, but almost all of them are saying 2016 will see more wild swings.