“There’s going to be a second recession. You have to get out of the market NOW!” Said my friend. “It’s going to be a double-dip recession, and the second dip will be REALLY bad. Even treasuries won’t hold up if there’s a triple-digit inflation. You should do what I did. I gave a big chunk of my money to an Australian guy that buys real gold for you and holds it in underground shelters.”
This was a real conversation with a real life friend, and as depressing as it was, the conversation also got me thinking about how fear can lead to irrational behavior and how I should prepare myself to not get sucked into such behavior.
Don’t Let Fear Guide Your Decisions
The problem with acting out of fear and being irrational is that you are guaranteed to lose money that way. Selling your entire stock portfolio is likely going to be costly in terms of trading costs, and even more so if you sell when the market is down. It’s been said before – the stock market is the only market where people buy when merchandise is expensive and sell when it’s cheap. If the market goes down but you’re young enough that you’ll have time to recover, my personal belief is that you should stay put and ride it out, even when it gets ugly.
But DO You Have Time To Recover From a Down Market?
That depends on your age. If you are in your twenties, thirties or forties and have at least ten years until you plan to retire, you probably have time. If you’re in your fifties or sixties, I don’t think you should put more than 20% of your portfolio in the stock market anyway. The risk is just too great at an age when you will soon need to live off your nest egg.
How You Can Protect Yourself
Sure, the market can get scary. It got scary in the early eighties, in the early nineties, and again in 2000 – 2002, after the dot com bubble had burst. It got scary in 2008. It got scary many times before and many times in between, and will get scary many times in the future. The market moves in cycles, and those can be harsh, but in the long run, over a period of a few decades, the market is very good to those invested in it.
If you decide to stay in the market despite fears of a second recession, you do need to take a few basic steps to protect yourself:
1. Never try to time the market. You will almost always end up losing. Timing the market is like gambling. Some people develop the skill to learn how to profit, but pretty much everybody loses. What are the odds of winning when you gamble?
2. Keep your portfolio well-diversified. You should never invest solely in stocks. many experts tell you to go by the rule of subtracting your age from the number 100 to determine what percentage of your portfolio should be in the stock market, but I say, do what feels right to you. I never felt comfortable with more than 40% in the stock market, and I’m not even 40.
3. Protect yourself from inflation. TIPS and a cheap gold ETF are a great way to diversify your portfolio and provide some protection against inflation.
4. If you plan to retire in ten years or less, be VERY conservative. Personally, I would not hold more than 20% of my portfolio in stocks if I were planning to retire in ten years or less. The risk of overwhelming losses is just too great, and you won’t have time to recover. Younger people will.
Disclaimer, and a Question
I’m not a financial adviser. I’m a self-taught investor, and as such, I believe that under no circumstances should an investor panic and allow herself to act irrationally. But what works for me may not work for you. You should definitely do your own homework and decide for yourself.
Do you have a plan in case there’s a second recession? Are you worried?