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AS YOU NO DOUBT noticed, the stock market took investors on a wild ride last week. On Wednesday, the Dow industrials dropped more than 800 points. On Thursday, the Dow lost another 546 points. Friday was better, up 287 points, but there was still plenty of stomach-churning volatility.
At times like this, I’m reminded of Warren Buffett’s motto: “You want to be greedy when others are fearful, and you want to be fearful when others are greedy.” While that certainly sounds logical, Buffett is also a multi-billionaire. He can afford to be serene when others are stressed. What should ordinary investors be doing? Here are five thoughts:
1. Don’t let the headlines scare you. Since 2009, the U.S. market has quadrupled in value, delivering positive performance every single year. We are now in the longest bull market on record, and this has experts like Nobel Prize winner Robert Shiller cautioning that the market is dangerously overvalued. Things might indeed get worse.
But be careful when listening to market prognosticators. It’s still anyone’s guess which way things will go from here—and one piece of news could easily change the market’s direction. While the U.S. stock market has ended each of the past nine years on a positive note, it experienced a midyear decline of more than 10% in six of those nine years, before rallying once again.
2. Don’t react, but do reassess. Because of the market’s unpredictable track record, I would avoid reacting to its short-term movements. But I would use it as an opportunity to reassess your portfolio’s risk level—not just from a financial standpoint, but also from an emotional one. While your financial situation might suggest you can weather short-term losses, you also need to sleep at night—and those aren’t necessarily the same thing. My suggestion: If you’re feeling rattled by last week’s headlines, spend some time revisiting the makeup of your investment portfolio.
3. It isn’t too late to make a change. If you conclude that a change is in order for your portfolio, don’t worry that it’s too late. Yes, stocks are down from where they were trading in recent weeks. But recognize that those were all-time highs. In fact, the market is still in positive territory for the year to date. It is hardly too late.
4. If you have any loans, this is a good time to revisit their terms. As you may have read, last week’s slide in the stock market was triggered, in part, by the Federal Reserve’s decision to raise interest rates. This means that any debt with a variable rate is becoming more expensive. This includes home equity lines of credit, adjustable-rate mortgages, brokerage account margin loans and, of course, credit cards.
My advice: Take an inventory of any variable-rate loans you might have. Understand when the rates can adjust and by how much. If possible, look for ways to pay these down or to restructure them into fixed-rate loans. Just as the stock market is still near all-time highs, interest rates are still near all-time lows. Yes, borrowing rates have gone higher, but they are still extremely attractive relative to any other time in the last 50 years.
5. If you have cash or bonds, avoid long-term commitments. When you’re a borrower, you want to lock in low rates for the long term. But when you’re on the other side of the transaction—when you’re the one receiving interest—you want to do precisely the opposite: You want to avoid long-term commitments at low rates.
If you’re buying bank CDs, I would stick to one-year terms or shorter. If you’re buying bonds, I would choose maturities well inside of three years. Why? The Federal Reserve has indicated its intention to raise rates several more times over the next few years. If that happens, you’ll be able to earn more on new bonds next year than you can on the bonds you buy this year. That doesn’t mean I wouldn’t buy bonds today; it just means I would keep your options open by avoiding long maturities.
Adam M. Grossman’s previous blogs include When to Roth, Not for You and Off Target. Adam is the founder of Mayport Wealth Management, a fixed-fee financial planning firm in Boston. He’s an advocate of evidence-based investing and is on a mission to lower the cost of investment advice for consumers. Follow Adam on Twitter @AdamMGrossman.
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