The name Irving Fisher is not widely known, but maybe it should be.
In his day, Fisher was a renowned economist. He graduated first in his class from Yale, received the first PhD in Economics ever issued by Yale and then went on to join the school’s faculty. Despite all that, however, he is remembered mostly for making one wildly inaccurate economic prediction: On October 15, 1929 Fisher stood in front of an audience and proclaimed that stocks had reached a “permanently high” level. As we all know, however, just days later the market began a steep decline that ultimately took it down nearly 90 percent.
I hesitate to draw parallels between 1929 and today. While it’s true that the market has tripled since 2009, the 1920s saw much more extreme highs. In fact, the market rose six-fold in the years leading up to the crash. And, while history provides a point of reference, things never repeat in precisely the same way.
Still, as the market today keeps hitting new highs, many investors are asking what to do.
Here are seven suggestions:
Avoid envy. If you’ve seen your friends make money on bitcoin (up 190% this year) or on Amazon or on anything else, resist the temptation to chase those investments. What worked yesterday may not work tomorrow.
Don’t put too much stock in the financial news. A media favorite these days is the “VIX.” But, be careful. This is a backward-looking indicator. Just because the market has been smooth doesn’t mean that it will be smooth.
Don’t lower your standards. With interest rates so low, you might consider lowering your standards to earn more income. For example, Argentina’s government bonds pay about twice as much as U.S. Treasury bonds. But that’s for good reason: their history of defaulting. My advice: stick to higher quality investments.
Understand your investments. I recently examined a popular investment fund that allocates money out to more than 90 other investment funds. In my view, this is too complex. When the market hits a rough patch, you’ll feel more comfortable if you really understand what you own.
If you are in, or close to, retirement, check your asset allocation (i.e, your split between stocks, bonds and cash). A good way to test it is to ask how you would weather a 20, 30 or even 50 percent drop in the stock market? Do you have sufficient savings? Would you be able to adjust your spending? Would you be able to earn more money to fill the gap?
If you are still working, and your employer has a 401(k) or 403(b) plan, be sure to keep investing through thick and thin. If the market drops, don’t be scared into suspending contributions. Remember, the best time to be buying is when the prices are low.
If you have surplus cash, invest methodically over time. For example, invest a portion each month over the coming six or twelve months. Sure, the market could keep going up, but it might not. In the absence of knowing what’s coming, it is reasonable to be cautious.
I want to stress again that I am not predicting a market downturn. I don’t know if the road ahead will be smooth sailing, if there will be a pothole or if there will be a sinkhole. If there’s anything that Irving Fisher taught us, it’s that no one knows. That’s why it’s so important to take steps today to ensure that you are adequately prepared for tomorrow.