Weathering a correction
As stock markets rise, investors should expect occasional sell-offs. Plan ahead and prepare your portfolio from being blindsided, Bob Landaas says in a Money Talk Video. Here is a transcript of the video.
After going up 14 percent last year, the S&P 500 is up 15 percent this year, and I don’t blame investors for wondering, should I take some money off the table; when are we going to get a correction?
Historically, we know that 10-percent corrections come on average every 29 months in modern history. We know that the stock market generally sells off by over 20 percent every four and a half years.
So the corrections aren’t a matter of if. They come. A couple of years ago, we had a 20-percent correction that lasted the better part of five and a half months.
My best guess is we will see a correction late this spring, perhaps into the summer. I don’t think it’ll be as bad as a normal sell-off of 10 percent or more. My guess is that we will see a pullback.
But it’s important to underscore the concept we are in a very low-interest rate environment and there’s not much competition for stocks now.
So my basic advice to most folks is to establish an investment policy where you’ve got clear guidelines of how much to have in stocks and bonds. It’s the most important issue for investors.
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We know from studies that if you get much past 55 percent in stock, your risk line keeps going up, but your return line will clearly flatten out. And as a result, you want to stay with roughly 45- to 50- maybe as high as 55 percent in stocks.
So having said that, my advice for most investors is to draft an investment policy statement where you’ve established the bands of your portfolio. If you’re going to have 50 percent in stocks, 50 percent in bonds, don’t be afraid to rebalance that portfolio every year or so to stay within your bands.
The hard part about markets is that it’s the unexpected that typically take markets down. So we can obsess about known risk, but in my experience it’s the unknowns – the proverbial meteor from outer space – that blindside investors and take stock prices lower.
To do really well as a stock investor, it’s critically important that you stay in the game. Resist the temptation to try to game the system. Resist the temptation to try to sell when you think stock prices are high. Resist the temptation to try to time the market. Even the pros can’t do it.
So for people that are just casual observers of the investment scene, they should do whatever it takes to resist trying to time the market. Academic studies again show that it’s less than 8 percent of how well you do. So you have to weather the storm, perhaps batten down the hatches when you think the storm clouds are on the horizon, but for most folks, it’s time in the market, not market timing that pays the biggest benefits.
Bob Landaas is president of Landaas & Company.
Money Talk Video by Peter May
(initially posted May 30, 2013)
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