In a recent interview with a potential client, I noticed that all of her investible assets were in cash.
When I asked for the reason behind this lamentable state of affairs, she replied that another adviser recommended that she sell her stock funds because “the market is getting pricey,” or words to that effect. There’s only one reason that she followed his advice — he scared her.
This reminded me of a 2013 article in The Wall Street Journal, “What Are You Afraid Of?” The article provided recommendations to follow if any of the following scary scenarios comes to pass:
- Stocks suddenly start sliding
- A natural disaster or war sparks market panic
- Interest rates jump
- Interest rates remain low
- Deflation threatens
- Inflation surges
- Europe’s fiscal crisis erupts again
Pick your biggest worry from the list. If you follow the suggested actions, you’ll be left with a narrowly focused, undiversified portfolio. Recommendations for one scenario might be the worst course of action if another scenario occurs instead. If your chosen anxiety comes to pass but your timing is off, the recommended actions might do more harm than good. And let’s be honest, no one knows if any of these seven events will occur or what their consequences might be.
You’ll find similar, investor demoralizing articles everywhere in the financial media — most of which describe low probability, unlikely events. Often, they frighten investors into making hasty, emotional decisions that cause more long-term financial damage than the scary events themselves. The most damaging consequence of the financial crisis wasn’t the temporary 50 percent decline in stock prices. It was the unrecoverable loss experienced by those investors who sold in panic and have remained in cash for the past six years.
The world is complicated, the future is uncertain and periods of turmoil are commonplace. There’s nothing you can do about it, so get used to it. When there is nothing but fear in the air and investor confidence is low, a well constructed portfolio, a prudent investment strategy and a long-term focus can help you stay the course and continue funding your retirement accounts. At such times, disciplined investors have the opportunity to take advantage of temporarily low asset prices.