Going down? As you step into the elevator, CNBC’s market report greets you over the speakers. There’s another crisis in Washington and stocks are tumbling. This is not what you need to hear. Work is unpredictable, your kids’ tuition is rising, your home renovation is over budget…Sell, sell! your inner broker commands.
Or maybe it’s happy hour, and you just bought your buddy another bourbon. He’s telling you about his investment portfolio. His Amazon stock rose $200 per share from January through May. “Dude, you should buy some,” he says. “Don’t you buy, like, everything from them?” You do! You do! Buy, buy! your inner broker orders.
The emotional push and pull of the market makes you feel like you’re doing everything right, until it seems like you’re doing everything wrong. What should you do? Probably nothing.
“Market news seems to create an emotion —I need to sell everything or I need to buy a lot—but that’s when it tends not to be the right time,” says Eric Meerman, a certified financial planner and the vice president of Palisades Hudson Financial Group in Stamford. “If you’ve attempted to avoid the downturn, when do you get back in? You may delay and miss the upside.”
Meerman has witnessed the burst of the dot-com bubble, the mortgage crisis, the recession—only to see the market rebound with gusto within five to seven years. While many brokers respond to major movements with a flurry of activity, Meerman says that this costs money in the long term, perhaps two to three percent each year in returns. His advice is to stay the course over time.
“People think there’s a way to play the market or that you can outsmart it and get in and get out. But the secret is to have a plan and stick to it, not change it based on your emotions or the relative level of the market. Rebalance depending on your asset allocation,” he says. “A lot of people, left to their own financial devices, don’t do well.”
He suggests a realistic investment approach created to meet your goals over time, then maintain it—a nudge here, a rebalance there—to stay on track. The only reason the approach should change is because of a lifestyle change, for example, if you get divorced, have a child or lose a job. Volatility should be built into the plan.
“We like to coach people to be rational and unemotional in times of great stress, and to calm them down and not take too much risk in times of euphoria. Over the long term, the market is going to continue to trend upwards as generations go by.”
Similarly, he doesn’t believe that investors should chase returns outside of the market unless they are familiar with the territory. Take investment real estate. “If you’re a busy person who doesn’t have any real hands-on skill with house maintenance,” he says, “it’s probably not a good idea, unless you’re a contractor or have an aptitude and desire to be a landlord.”
Same goes for hedge funds. While it may sound hip to tell your pals that your money is in a hedge fund, “make sure you understand the cost. The fees associated with them can be very high, so the net return can be suboptimal. The vast majority of hedge funds don’t perform in line with the market. If you’re looking at a single-digit return with outsized risks, what’s the point?”