My wife is getting nervous about the stock market. It’s been more than a decade since the market tanked in 2008-2009.
With Federal Reserve Chairman Jerome Powell saying recently that “uncertainties around trade tensions and concerns about the strength of the global economy continue to weigh on the U.S. economic outlook,” is it time to pull back from stocks?
Strangely enough, at least in the short term, if the Fed actually lowers interest rates that means bond yields also drop. Since stocks are constantly competing with bonds for total return, that usually triggers a stock market rally, which has been the case most of this year.
What is the Fed seeing that we don’t see? I’m not sure, but I’m not willing to bet I will ever know when the market will turn. You shouldn’t place a wager either.
Whenever the prospect of market timing comes up, my advice is simple: Don’t do it. If you guess right, you’re lucky. If you guess wrong, you’d be in the majority and lose money.
What should you be doing? I came across these great tips from Oblivious Investor:
— Diversify, in the sense of “not having a large percentage invested in any one company.” Own stocks and bonds across the world.
— Keep costs low. Invest in cheap index mutual funds.
— Make sure that your asset allocation does not make you uncomfortable — and will not make you uncomfortable even when the market is doing poorly.
— Have a specific plan for how you will change (or not change) your portfolio mix as you age and in various market circumstances. For example, will you rebalance into stocks when the market falls, or not?
— Will you rebalance out of stocks as the market rises, or not? Having a specific plan is better than making it up as you go along. (If nothing else, it helps you keep your sanity: “I’m sticking to the plan” — whatever the exact plan happens to be.)
— Keep your spending rate low-ish if at all possible (below 4% in early retirement — ideally even below 3.5%; a higher rate is OK later in retirement).
— If your spending rate is low-ish, then any diversified allocation should be OK. A higher stock allocation is likely to result in a larger bequest (and/or higher spending late in retirement) and a bumpier ride along the way.
In short, have a long-range plan and don’t succumb to short-term fear. That’s the best strategy.