It is Monday afternoon on August 24, 2015. Compared to this time last week, the major US stock market indices are down over 5%. That’s a pretty big loss for one week.
Is this the start of a market crash? Have we hit bottom? I don’t know.
This is going to be a boring blog post. You’ll hear no breathless predictions from me.
This is what I know:
- Any investment, (other than a bank account Certificate of Deposit), will increase and decrease in value.
- If you want to invest your money for growth or income your options are stocks, bonds, commodities, precious metals, real estate or esoteric “alternative” investments.
- If you choose to invest ALL of your money in only one of these options, you have to accept that the value of your portfolio is going to fluctuate. If you invest ALL of your money in stocks, commodities or precious metals, you have to be prepared for BIG fluctuations in the value of your investments.
- If you invest your money in a mix of stocks and bonds, your portfolio will fluctuate in value, but typically not as much as a 100% stock portfolio.
- You should consider three things when deciding how to split your money between stocks and bonds:
What is your TOLERANCE for risk?
If you’ve got butterflies in your stomach or you’re losing sleep because the stock market is down, I don’t think that you should have the majority of your money invested in stocks.
What is your TIME horizon?
If your portfolio is intended to provide you with retirement savings 20 or 30 years from now, you have time to allow the stock market to recover from whatever is going on right now.
What is your CAPACITY for risk?
I think CAPACITY for risk has two components. There is time, as mentioned above. If you are planning to retire in 10 years or less, your capacity for risk is lower than an individual who will need their money in 20+ years.
The second component is this – Are you relying heavily on your portfolio to maintain your standard of living in retirement? If the answer to that question is yes – I suggest, strongly, that you take a look at your investments. If you expect to retire in 2 years, it may be time to shift some money out of stocks to protect the gains you have received over the last few years. If you expect to retire in 3 to 10 years, it would be a good time to come up with a plan that will gradually reduce the risk in your portfolio.
I was doing this type of work in 2008. I met with too many individuals, who were about to retire, when their retirement savings fell by 40% to 50% because they had too much money invested in stocks. As a result, they had to work longer than planned or cut back on their standard of living.
I don’t know if the stock market will continue to fall. I don’t know if this is just a temporary blip and stocks will continue to increase in value for a bit longer or forever.
I DO know that I don’t want you to have to change your plans for retirement because your investment portfolio was too risky. Feel free to give me a call at 1-800-775-8564 or go to the "Contact Us" page if you would like to have me take a look at your situation.