As markets shake and rattle day in and out, investors are getting skittish. A few days ago, the stock market dropped over 300 points one day, only to skyrocket 400 points the next. Meanwhile, the venerable, old-guard Wall Street firm Bear Stearns went kaput in only a few days.
What does an investor do? Stay the course, say experts. During good markets and bad, investors must religiously stick to their overall asset allocation targets.
Choppy markets merely signal key times to meet with advisors and rejigger allocations that rise and fall with the market. This is no time to flee into cash, experts add.
Instead, check portfolio allocations, says Gary Schatsky, a fee-only financial advisor in New York City. “Investors have short-term horizons,” he says. “Six months ago, they wanted their assets in equities. For some people, [market] concerns are shaking levels of optimism that they shouldn’t have had.”
Use this time to take an overall inventory of your assets, he adds. Is your financial picture balanced? Is your overall allocation consistent with your risk tolerance and tax bracket? Are you taking advantage of tax losses?
“You can’t be frozen,” he adds. “You must be proactive.”
Many experts say that there’s no one-size-fits-all allocation model, though. Exact allocations depend on the individual, including factors such as age, cash flow, income tax bracket and the like.
“General allocation guidelines are ridiculous,” says Schatsky. “You have to temper them with myriad factors.” That holds true even during trying times like these, experts add. That is, unless an investor can’t sleep at night. “Then, it’s OK to trim back somewhat,” says Schatsky.
Retreating to cash can be complicated, anyway. Six-month CDs are now only paying 2.9% rates, compared to 3.01 just a week ago. Munis are paying higher yields, mainly because they’re bedeviled by subprime woes. Schatsky recommends buying high-quality muni funds, though. ”There’s tremendous opportunity,” he says.
Schatsky recommends Vanguard’s group of mutual funds, because they’re no-load and carry low fund expenses. In general, he advises switching to short-term bond funds over CDs. The exception is “teaser rate CDs that are particularly attractive” even though they may only last a year. He also suggests adding foreign bond funds, despite “interest rates in Europe are exceptionally low.” Here, he recommends PIMCO’s foreign bond funds unhedged.
“If you don’t have a diversified portfolio, now’s the time to get one,” agrees Ric Edelman, a financial advisor based in Fairfax, Virginia. “With such uncertainty, we’re experiencing all the evidence you need.” Clients should take a long-term view of at least five years, he adds, because it’s easy to predict what will happen. He advises investors with a three-year time horizon to park their money in CDs and Treasuries.
Edelman places investors in 18 or 19 sectors using exchange-traded funds and mutual funds. “We buy baskets of stocks,” says Edelman. “Individual stocks are too risky.” To rejigger assets, Edelman advises selling the ones that are over-weighted at a profit and buying more under-weighted ones.
The rule, he says, is letting the market guide allocations. “Don’t make big bets,” he says. “And try not to speculate.” Like Schatsky, Edelman doesn’t recommend holing more cash during scary times—unless you’re facing a job loss or looming college expenses for your kids.
Bear Stearns lightning-fast demise is another opportunity to recheck portfolio assets. “Tragedy does have an upside,” says Schatsky. “People start paying attention to things they’ve taken for granted.”
That means checking SIPC (Securities Investor Protection Corp.) coverage, which covers client losses up to $500,000. Though many firms are covered, it still pays to make sure that you haven’t exceeded limits. And after the collapse of Bear Stearns, it is worth checking to see if your investment team is still intact.
Keeping your eye on the long-term horizon during scary times can pay off. The trick is not abandoning the stock market and hiding out in low-yield CDs. “Keep a broad array of exposure,” says Edelman. “That way you won’t have to guess what will happen next.”
Wise words in troubled times.