Yesterday I opened Money Magazine to find these rosy predictions:
“All markets are increasingly at risk.”
“Some stocks in America are turning into a bubble…It’s going to collapse. It’s going to be the biggest in my lifetime.”
“It’s going to be agonizing. There won’t be anywhere to hide.”
To be sure, the market has been going up, virtually non-stop, for more than eight years, so it’s not unreasonable to worry that the next move might be down. But, what is any of us realistically supposed to do with doom-and-gloom predictions like this?
The fact is, even experts are notoriously bad at predicting recessions, and it’s very hard to successfully “time the market” — that is, jump in and out at precisely the right times. The data indicate that generally these strategies result more in whipsaw than in profit.
So what are we supposed to do if the experts are warning of a market “collapse” but the data show that it’s counter-productive to react?
As I was thinking through this question, I happened to receive an email from a reader — I’ll call him Daniel — who was grappling with a related set of worries. My discussion with Daniel made me realize that there are actually two types of financial worries that might be on people’s minds right now. It’s important to understand them, and to differentiate between them, because each has a different solution.
The standard fear about a market crash is well understood. I’ll call that a Level I fear. But that’s not what Daniel was worried about. As a practicing physician with a secure job, a market crash wouldn’t necessarily impact him. So, he doesn’t have Level I fears. Instead, the questions “that weigh on me,” he said, are all longer term: “how much to save for retirement, how much to save for college, and trying to balance the desire to actually enjoy life now.” In other words, Daniel isn’t worried about next month or next year, but he is worried about the next decade and the decade after that. Daniel’s worries — the long-term sort — I’ll call Level II fears.
While everyone’s situation is different, this is how I would address each of these types of fears:
Let’s start with Level I fears:
Do you find yourself worrying constantly about the market, living in fear of every headline, petrified what you would do if it took a dip? If so, then that’s a clear indication that you have the wrong asset allocation in your portfolio. (Asset allocation is the mix between stocks, bonds and cash.) The solution here is straightforward: You’ve got to make a change to your portfolio. How much of a change? Again, everyone is different, but a simple litmus test is this: Dial back on your stock market exposure to the point where you no longer feel worry. As you dial back on your risk, you’ll know that you’ve got it right when you feel you could withstand perhaps a few years of negative returns in the stock market without worry.
And what about Level II fears, the sorts of things Daniel is concerned about?
If your worries are longer-term, here’s what I recommend: This weekend, sit down at your kitchen table with a blank sheet of paper and sketch out a plan. It doesn’t need to be long or complicated or even permanent. But, it does need to be specific, and it needs to be in writing. Here’s how I’d do it, in five steps: (1) Articulate each of your big goals; (2) Put a dollar number on each goal; (3) Attach a time frame to each goal; (4) Identify a funding source for each goal. (Examples of funding sources include: your paycheck, a savings or brokerage account earmarked for a specific goal, a 529 account, Social Security or a pension.) If you’d like some help getting your goals organized in this way, click here to download an easy-to-use worksheet.
Then, comes the last step: If you identify any funding gaps in your plan, you’ll want to find a way to fill them, either by scaling back on that particular goal or by identifying additional funding sources (such as a part-time job in retirement). Alternatively, if it turns out that you have all of your goals covered, then you can put your plan away in a drawer, tune out the financial headlines and go back to enjoying life. Yes, you’ll want to revisit your plan periodically, but in the meantime, try to avoid distracting yourself with worry.
These approaches, I believe, will help you ride out a market downturn, whenever it comes, and and in the meantime, provide you with greater peace of mind that you are on track toward your goals, regardless of what the headlines say.