The April cover of Kiplinger Magazine said “Still Spooked by Stocks? How to get over your fears and learn to love the market again”. The advice could have come a little sooner, considering the Dow finally broke through the 2007 high in March. Market analysts are all over the media explaining why stocks are poised to move higher or … why stocks are ready to fall. I even received an email from Harry Dent titled “Look out below!” Mr. Dent warns the Dow is headed to 3,000 in the near future. Yikes!!!
My advice to those still spooked by stocks is not to get back in — at least until they admit they should never have gotten out in the first place. The future will never be less uncertain or less clear than it is right now. The stock market could shortly drop the moment you get in, but that’s OK, provided you haven’t sold out when it recovers. Those investors who rebalanced when the market was down in 2008 and 2009 recovered their losses long before the Dow got back to 14,000. It wasn’t a fun ride at times, but it was the right thing to do.
Retirees frequently tell me they can’t afford the risk of the stock market at their age. They are focusing too much on the volatility of the stock market and ignoring the risk of inflation. You cannot maintain your standard of living through 20 years of retirement with a 100% fixed income portfolio. You need the growth that comes from a diversified stock portfolio. This portfolio is combined with an allocation to fixed income which helps to reduce volatility. Allocating between stocks and fixed income provides a place to store some of the gains when the market is going higher. It also provides a source of funds to be able to buy stocks when the market is going down. Buying low and selling high is a solid investment strategy.