The recent wild swings in stock prices have left many average investors flustered. But a broad cross-section of money managers offered them the same simple advice: just calm down.
People on the verge of panic about the performance of their 401(k)s or other investments should take a deep breath and methodically review their investment strategies, money managers and financial planners said.
“At times like this, you have to embrace your inner Spock,” said Charles Sizemore, the Dallas-based editor of the Sizemore Investment Letter. “There is nothing like a good crisis to make you re-evaluate your investment plan.”
After multiple market crashes of the past few years, it has become a familiar refrain: Does your portfolio have a good mix of stocks and bonds? When do you need the money you have invested? If that time is far off, you shouldn’t react to every drop in the markets. But if you bought, say, energy stocks on the expectation of robust economic growth in the near future, “you might want to reconsider,” Sizemore added.
Above all, the advisers say, resist the urge to make a quick buck off the market’s violent shifts.
Average-Joe investors are up against sophisticated computers that use complex algorithms to sense market trends and trigger stock transactions. The machines enable Wall Street types to reap huge profits by reacting to news in microseconds, and they leave little room for ordinary people to make money trading on home computers.
Overall, so-called high-frequency trades account for 70 percent of stock trading in the United States, according to a report by the Brattle Group, an economic consultancy.
Making the landscape more inscrutable is the complexity of world events fueling the market gyrations, from financial uncertainty in Europe to political dysfunction in Washington.
“Too often we see with our clients that people are prone to react to every piece of news that affects the market,” said Marshall Berol, co-portfolio manager of the San Francisco-based Encompass Fund. “They would be better not to react to each development because they come so rapidly. The trick is separating out day-to-day and hour-to-hour headlines from the underlying factors driving those headlines.”
But the curse of modern times is that the traditional advice of being patient and trusting that the markets will eventually provide returns doesn’t seem to be paying off.
U.S. stocks have been notoriously uneven over the past decade. The Dow Jones industrial average is actually below the level it hit in 2000 — and that does not even account for the cost of inflation.
After the financial crisis triggered historic losses that bottomed out in March 2009, investors have seen stock prices move on a generally upward path — until recently. Stocks are now in the red for the year.
Not knowing what else to do with their money, most American investors have grimly held on through the ups and downs. The percentage of U.S. households that owned mutual funds peaked in 2001 at 48 percent and was still at 45 percent last year, according to Investment Company Institute, which represents mutual fund and other investment companies.
Over the past three years, as the nation has struggled through the Great Recession and its aftermath, three-quarters of investors continued to plow the same or greater sum into mutual funds, according to an ICI survey released earlier this year. At the same time, the survey found that only about a third of investors shifted away from stocks to more conservative assets, including bonds and money market funds.
The problem with safer investments is that they may not provide enough returns for retirement.
So even in uncertain times, asset managers say that investors can do well if they remain determined not to respond emotionally to market swings, while keeping a careful eye to balance their holdings among a diverse mix of stocks and bonds.
Berol and others say average investors are best advised to stick to the basics and not try to make sense of the frenzy of activity surrounding the market.
“Investors should be looking at it as a buying opportunity,” said Gordon Bernhardt, founder of Bernhardt Wealth Management, a McLean asset management firm. “Every investor should have some sort of market allocation plan. Now is the time to rebalance and get back to that original strategy.”
Bernhardt pointed out that an investment portfolio diligently balanced among large cap, small cap, and foreign stocks, as well as bonds, would allow investors to earn strong returns even when individual stock indexes are flat for prolonged periods of time.
Although the Dow has been flat, Bernhardt said, “a globally diversified portfolio would have doubled its value over the past decade.”