Everyone’s a genius when the market is up

Everyone’s a genius when the market is up

And everyone is an expert in what to do when it goes down. Wrong and Wrong.

If you have a long term plan and it includes a broad based stock portfolio, you should stick to your plan, unless there are major changes in your life causing an alteration of your plans. Let’s examine what is being recommended and what I suggest.

The recommendations fall into two categories. Either stand pat and continue with your plan; or lessen the risk in your portfolio by shifting some funds into bonds. I agree with the former – stand pat. Not only that, but if you are a continuous buyer such as with your 401k, you have the opportunity to buy additional shares at lower prices. How often do you go to the butcher and hope the price of chop meat just went up? Well, stocks are on sale. There is a caveat – you must have a broad based stock portfolio.

Now, let’s look at the advice to sell some stocks to “lessen your risk.” If you have a sound plan with a sensible asset allocation to get you toward your goals, why would you change that after 3 or 4 days of a market drop? If that is what your advisors are recommending, then might I suggest that they did not put much thought in, and do such a good job with, the initial plan, and maybe you should look for other advisors. Also, if that is what they are recommending then might I also suggest that they are reacting to the market turmoil and not with the skilled aplomb expected of such esteemed and knowledgeable professionals. Two strikes against them!

Now a third comment. What does “lessen your risk” mean? If you want to lessen your risk, I think you should invest in risk free or very low risk investments. That means, to me, either short term U.S. Treasury bills, notes or bonds, insured bank certificates of deposit or most money market funds.

Now, let’s go a little further. The term “bonds” is a general description, not a specific investment. There are short, mid or intermediate, and long term bonds. There are treasuries, government, municipal and corporate bonds. There are U.S., foreign and emerging market bonds. There are investment grade AAA to BBB rated bonds, and junk or high yield and distressed bonds. Shifting stocks into bonds is not a by-the-numbers process. It takes thoughtful consideration and because each investor has different needs, risk tolerances, beliefs, dynamics, education, understanding and personalities you just don’t sell stocks and buy bonds. At least you don’t it if you want to understand why each recommendation is being made and how it fits into your long term plan and the effect on you and what can go wrong. Yet these so-called experts are interviewed and spew their sage advice to lessen risk with bonds – which I say is not responsible advice!

Further, some recommend bond funds. Totally full of risk and totally not risk free. Ask any financial planner if they believe bond funds are risk free. I believe none would say they are risk free. Now, I haven’t heard it all, but I’ve heard a lot of the arguments and these geniuses say that, because of the risk, they only recommend shorter term bond funds. Well, 1) Shorter term bond funds do not have any greater yield than bank certificates of deposit so why pay a fee for a bond fund when you can get insured CDs with no fee? 2) Shorter term bond funds, and CDs for that matter, will not get you closer to your goals since the yields barely exceed the inflation rate. 3) Shorter term [or any] bond funds have no maturity date. This means there is never a time when you can get your money back; you can only get the market value of the fund when you want to get out, and that could be higher or lower than what you invested. Either way, these are not risk free. Bond funds are not risk free PERIOD!

This should be enough to make my point to stay on your plan. By the way, I exclude what I call rainy day funds from asset allocation plans. This is the amount you should feel that you must have available in cash for a given period – whether it is six months or up to two years. And while you are holding this money, you should get some yield on it and that would be with a somewhat laddered CD portfolio. That is money you want absolutely safe, secure and available. The rest of your money is for investing to attain your goals and the asset allocation is a key for that. Keeping some of that parked in CDs is not a strategy I recommend.

I posted many blogs with my opinions and recommendations of how I think people investing to attain their long term financial security should invest. This blog is a reaction to the current market activity and calls I received and does not contain the details that each blog addressing singular topics goes into. You can search the archives for topics of your interest. Enjoy! Have fun! And be smart!