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I'm Tom Anderson of Kiplinger’s here to talk about one of the most unpleasant things investors face from time to time, what to do when the stock market takes a serious hit.
This is especially important in light of the fact that the US Stock Market experienced two drops of roughly 50% during the first decade of the 21st century. With 20-20 hindsight, it’s easy to say that when stocks began to fall at the onset of both those bear markets, investors should’ve sold.
But here’s the problem with that approach. At what point in the decline would you have known when to sell? Would it have been after the stocks fell 5% from their high points, 10%, 20%, 40%? The point is it’s very, very difficult to time the market’s ups and downs. The huge and totally out of the blue recovery of stocks following the 2007-2009 bear market underscores just how hard timing is.
So what’s the alternative to timing? Here’s what we at Kiplinger suggest. Based on history, stocks deliver the biggest returns over the long haul although they’re totally unpredictable over the short term, so we suggest putting money that you won’t need for many years into stocks and money that you’ll need sooner into bonds and money market type investments. That should result in a fairly well-balanced portfolio.
If you don’t have a strong stomach for risk, cut back on the amount in stocks. Rather than try to time the market, let your portfolio tell you what to do. Periodically, at least every six months, rejigger your portfolio to bring it back into line with the desired breakdown among stocks, bonds and cash investments.
If stocks have gone down, that means you should buy more stocks. If they’ve gone up a lot, sell some stocks. This process is called “rebalancing”. If you rebalance regularly, you don’t have to worry about when to get out of or get into the stock market.
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