As you may have seen, the stock market took investors on a wild ride this week. On Wednesday the Dow dropped more than 800 points, on Thursday it lost another 546 points and today it swung back and forth between positive and negative before closing about 1 percent higher.
At times like this I’m reminded of Warren Buffett’s motto: “You want to be greedy when others are fearful, and you want to be fearful when others are greedy.” But, while that certainly sounds logical, Buffett is also a multi-billionaire. He can afford to be serene when others are stressed. What should ordinary investors be doing? Below are some ideas to consider:
Don’t let the headlines scare you: Since 2009, the U.S. market has quadrupled in value, delivering positive performance every single year. We are now in the longest bull market on record, and this has experts like Nobel Prize winner Robert Shiller cautioning that the market is dangerously overvalued. So it would not be unreasonable to conclude that things might continue to get worse. But be careful of listening to market prognosticators. It’s still anyone’s guess which way things go from here, and any piece of news could easily change the market’s direction. Indeed, the market is frequently erratic. For example, as I noted, each of the past nine years has ended on a positive note, but in six of those nine years, the market experienced a midyear decline of more than 10 percent before turning positive again.
Don’t react, but do reassess: Because of the market’s unpredictable track record, I would avoid reacting to the market’s short-term movements. But I would use times like this as an opportunity to reassess the level of risk in your portfolio — not just from a financial standpoint but also from an emotional one. While the calculator might tell you that you can afford to weather losses, you also need to be able to sleep at night, and those aren’t necessarily the same thing. My suggestion: If you’re feeling rattled by the headlines this week, I’d spend some time revisiting the makeup of your your investment portfolio. Please call me any time to discuss this.
Don’t worry that it’s too late to make a change: If you conclude that a change is in order for your portfolio, don’t worry that it’s too late. Yes, the market is down from where it was last week, but recognize those were all-time highs. In fact, the market is still in positive territory for the year. It is hardly too late.
If you have any loans, this is a good time to revisit their terms. As you may have read, this week’s slide in the stock market was triggered by the Federal Reserve’s decision to raise interest rates. This means that any debt with a variable rate is becoming more expensive. This includes home equity lines of credit, adjustable-rate mortgages, brokerage account margin loans and, of course, credit cards. For that reason, I recommend taking inventory of any variable-rate loans you might have. Understand when the rates can adjust, and by how much. If possible, look for ways to pay these down or to restructure them into fixed-rate loans. Just as the stock market is still near all-time highs, interest rates are still near all-time lows. Yes, borrowing rates have gone higher, but they are still extremely attractive relative to any other point in the last fifty years.
If you have cash or bond investments, avoid long-term commitments. When you’re a borrower, you want to lock in low rates for the long term. But when you’re on the other side of the transaction — when you’re the one receiving interest — you want to do precisely the opposite: You want to avoid long-term commitments. If you are buying bank CDs, I would stick to one-year terms, or shorter. And if you are buying bonds, I would choose maturities well inside of three years. That’s because the Federal Reserve has indicated their intention to raise rates several more times over the next few years. If this happens, then you’ll be able to earn more on new bonds next year than you can on bonds you buy this year. That doesn’t mean I wouldn’t buy bonds today; it just means I would keep your options open by avoiding long maturities.
Where does the market go from here? I wish you I could tell you. But that doesn’t mean you can’t turn this week’s volatility into an opportunity to do some housekeeping in your financial house.