If you’ve been thinking that stock markets have been pretty quiet in 2017, you are right--it's been more like the merry-go-round and less like a rollercoaster. Through the first seven months of the year, none of three major stock market indexes has fallen by more than 5 percent. And one gauge of market movement, the CBOE Volatility Index (VIX), which measures investors’ expectation of the ups and downs of the S&P 500 Index over the next month, recently dropped to its lowest level in 24 years. Low VIX readings have tended to be equated with muted anxiety and high stock prices. Amid this environment, you might be wondering what could go wrong? There are always risks that persist and while their existence does not mean that long-term investors should change their game plans, they are a reminder to guard against complacency and to always approach investing with caution.
If you’ve been thinking that stock markets have been pretty quiet this year, you are right. Through the first seven months of the year, none of three major stock market indexes has fallen by more than 5 percent. And one gauge of market movement, the CBOE Volatility Index (VIX), which measures investors’ expectation of the ups and downs of the S&P 500 Index over the next month, recently dropped to its lowest level in 24 years. Low readings have tended to be equated with low anxiety and high stock prices. Amid this environment, you might be wondering what could go wrong? There are a number of risks to the US and global markets that persist. Their existence does not mean that long-term investors should change their game plans, but they are a reminder to guard against complacency and to always approach investing with caution.
Citing the slowdown in China and other emerging markets; a strengthening US dollar; global market volatility; and persistently low inflation, the Federal Reserve kept short term interest rates at 0-0.25 percent, which is where they have been for nearly seven years. Although the central bankers believe that these issues are “transitory,” they decided to err on the side of caution and do nothing. If Fed officials meant to soothe investors, they failed, at least in the short term. In the category of unintended consequences, the Fed’s inaction, which was meant to assuage, may have had the opposite effect, by reinforcing investors’ worries about the global economy. Previous fears about China’s growth, which caused the summer stock market correction, went straight to the front burner, despite scant evidence that the global slowdown has hit US shores.
Stocks edged lower the afternoon of the decision and tumbled the following session. Although a rate increase may have done even more damage to stocks, the fact that the Fed did not follow through on a rate increase, after telegraphing it for months, has led some analysts to question they can trust what officials are communicating to the public. Paul Ashworth of Capital Economics wrote “A few months ago it was Greece, now it is China. According to the Fed’s accompanying statement ‘recent global economic and financial developments may restrain economic activity somewhat." [His emphasis] In another couple of months it could be the debt ceiling or who knows what else that is generating the uncertainty.”
While the status of the world’s economy may be uncertain now, one thing is clear: median household income in the US is stuck. With all eyes on the Fed, few paid attention to the mid-week release of a Census Bureau report, which showed that median household income was $53,657 in 2014, an $805 decrease from 2013. This is the third consecutive year that the annual change was not statistically significant, following two consecutive annual declines.
More sobering is that when adjusted for inflation, the median household is 6.5 percent lower than it was in 2007 ($57,357), on the eve of the recession and 7 percent lower than it was 15 years ago in 2000 ($57,724), prior to the previous recession. (Income data from Sentier Research are a bit better, but show a similar trend—the median household income in July was 2.6 percent lower than when the recession started and 3.8 percent below January 2000 levels.)
Median income peaked in the mid-1990’s and since then, has gone nowhere fast. Despite hopes for overall wage gains in the current recovery, most of the progress on incomes has been clustered around the top 5 percent of all earners. The gap between high earners and low earners has increased 5.9 percent from 1993, the earliest year available for comparable measures of income inequality.
I hate to end on such a sour note, so perhaps wages will soon start to show improvement across all income levels. Chairman Janet Yellen said that the pace of job gains has been “solid” and fed officials raised their growth forecasts for this year, so maybe, just maybe, the income numbers will start to pick up. Even if they don’t, a sunnier outlook in the fourth quarter is likely to prompt the Fed to raise rates by a quarter-point, either in October or December.
- DJIA: 16,384 down 0.3% on week, down 8% YTD
- S&P 500: 1,958 down 0.2% on week, down 4.9% YTD
- NASDAQ: 4,827 up 0.1% on week, up 2% YTD
- Russell 2000: 1163, up 0.5% on week, down 3.4% YTD
- 10-Year Treasury yield: 2.19% (from 2.19% a week ago)
- October Crude: $44.68, down 0.01% on week
- December Gold: $1,137.80, up 3.1% on week
- AAA Nat'l avg. for gallon of reg. gas: $2.30 (from $2.35 wk ago, $3.36 a year ago)
THE WEEK AHEAD:
8:30 Existing Home Sales
Thurs 9/24: 8:30 Durable Goods Orders
10:00 New Home Sales
5:00 Janet Yellen Speaks at UMass/Amherst
8:30 Q2 GDP (final reading)
10:00 Consumer Sentiment
October, month of crashes, has brought out the bears. It has been three long years since the broader indexes have seen downside moves of 10 percent and just like clockwork, here it is October and we have finally come close to the much-anticipated correction. The selling has been attributed to a slow churn of worry, which started with concerns about global growth stalling, especially in Europe and China. The fear is that just as the US economy has found more solid footing, the rest of the world might drag down the economy and corporate earnings to boot. In the week prior, investors vacillated between confronting those fears head on, and thinking that perhaps the Fed might keep interest rates lower for a longer period of time, which would help buoy markets. The “Fed to the Rescue” rationale may have limited the initial damage to stock markets, but the bears took control last week and dumped out of stocks and poured into the safety of bonds.
It is always scary to see and hear about big point losses, but context is important. On Wednesday, the Dow Jones Industrial Average dropped by more than 460 points, which seems pretty close to the 508-point loss that occurred on October 19, 1987. That day came to be known as "Black Monday" because those 508-points represented a 22.6 percent loss in a single session, the greatest one-day percentage loss Wall Street had ever suffered.
When the Dow was at its lowest level of the day on Wednesday, it was down just 2.8 percent. In fact, at current levels, the Dow would have to plummet about 3,700 points in one day to match the damage seen in 1987. And although the financial crisis of 2008 was more severe and dangerous to the entire financial system than the crash of 1987, Black Friday remains the most dramatic day of trading that most have ever experienced on Wall Street.
Still, the October action has spooked many investors, leading some to worry that a crash—or even a bear market, which is defined as a 20 percent drop over two months, could be coming. The S&P 500 has experienced 12 bear markets since the crash of 1929, most of which occurred in, or around, economic downturns. According to Capital Economics, the current sell-off is unlikely to mark the beginning of the dreaded 20 percent drop, because bear markets do not normally occur in the middle of entrenched recoveries. “There’s nothing in the US data that has fundamentally altered our view on the outlook for the domestic economy…the near-10 percent fall in equity prices has sparked fears that something more pernicious lies ahead. But that drop in equity prices looks out of kilter with the health of the economy.”
Of course market drops could certainly wipe out a portion of household wealth, which may curtail consumer spending and hurt growth. But energy prices have plummeted alongside sagging stock prices and the net effect of lower prices at the pump should more than make up for the hit to the wealth effect from stocks. Still, for those who are worried that a crash or the next bear market is around the corner, the following aphorisms might be worth revisiting:
- Cash is King: For those investors near or already in retirement, a cash cushion of 1-2 years of living expenses can reduce the urge to panic and sell at the bottom.
- Planning is Queen: A thorough financial plan that contemplates both good and bad markets can help you navigate a crash and its aftermath.
- Diversification and rebalancing complete the Royal Family: Understanding your risk tolerance to build an asset allocation on a diversified basis, followed periodic rebalancing really can help protect your money when the next crash occurs.
MARKETS: It was a topsy-turvy week, which caused the volatility index (VIX) to surge to a 2014 high of 31.06 on Wednesday. By Friday, the VIX dropped to 22, a lot closer to its long-run average of around 20, but twice as high as the July low of 10.32 and up nearly 74 percent from a month ago.
- DJIA: 16,380 down 1% on week, down 1.2% YTD (-5.2% from all time high on Sep 19; correction at 15,615)
- S&P 500: 1886, down 1% on week, up 2.1% YTD (-6.2% from all time high on Sep 18; correction at 1817)
- NASDAQ: 4258, down 0.4% on week, up 2% YTD (-7.4% from 2014 high on Sep 2; correction at 4149)
- Russell 2000: 1082, up 2.8% on week, down 7% YTD (first weekly gain in seven)
- 10-Year Treasury yield: 2.2% (from 2.31% a week ago)
- November Crude Oil: $82.75, down 3.6% on the week
- December Gold: $1239.00, up 1.4% on the week
- AAA Nat'l average price for gallon of regular Gas: $3.12 (from $3.36 a year ago)
THE WEEK AHEAD: With stock markets wobbling, bond prices are rising, yields are falling and rates for mortgages are tumbling to the lowest levels in over a year. The housing market could use a boost, but the recent drop in rates will not provide any help until next month’s data are released.
Apple, Halliburton, Hasbro, IBM, Texas Instruments
eTrade, Harley Davidson, Kimberly Clarke, McDonald’s, Verizon
10:00 Existing Home Sales
AT&T, Boeing, General Dynamics
3M, Amazon, Microsoft
8:30 Weekly Jobless Claims
10:00 Existing Home Sales
If the past week’s news cycle did not rattle investors, what will? Oh sure, on Thursday when it seemed like the world was spinning out of control, the CBOE Volatility Index (VIX), which helps gauge investor fear, surged 32 percent, its biggest jump in more than a year. Then on Friday, it fell 17 percent to 12.06, far below historical norms of around 20. Evidently, geopolitical events are not sufficient to cause more than a one day stock sell-off and flight to quality, most of which was reversed on Friday. So what would it take? Maybe run of the mill inflation, which has been almost absent for the past six years, would spook investors.
Headline inflation (CPI), which includes everything you care about, is up about two percent year over year. I know what you’re thinking: Why would the central bank exclude the stuff that impacts my daily life? Surely when I am spending more on food and gas, I have less money to spend elsewhere in the economy. (A recent Gallup poll found that 1/3 of Americans said higher prices are impinging on their ability to spend on travel, dining out and leisure activities.) But the Fed is not tasked with addressing short-term price increases, like those at the pumps, or even for agricultural items like beef, pork or chocolate -- the central bank can’t be at the mercy of the weather or events in the Middle East.
That’s why during the recovery, when prices have increased sporadically, the Fed downplayed the idea of broad-based inflation, calling the higher readings transitory (like when gas spiked due to the Arab Spring). More recently after the Fed’s June policy meeting, Chair Janet Yellen said that while “Recent readings on, for example, the CPI index have been a bit on the high side,” the data are “noisy.” Translation: Stop worrying about inflation—we have it under control.
The Fed is looking for a gradual increase of core inflation, which excludes food and energy, to a pace of two percent annually. Over the past six years, core inflation as measured by the CPI or by the Fed’s preferred metric, the Commerce Department’s personal consumption expenditures price index (PCE), has remained below that level. But over the past three months, core prices have started to accelerate across a variety of categories, including shelter, airfares, clothing and medical care.
It’s not so far-fetched to see how as the economic recovery accelerates, a chain of events is likely to spur price increases. Here’s what could happen: as the labor market improves, there is likely to be an increase in wages. As people earn more money, they may be willing to spend more. An uptick in spending could be the opening that retailers have been waiting for since the recession and allow them to finally increase prices for all sorts of stuff.
While it is unlikely that any of this would create runaway inflation, despite what some inflation hawks (including the usually wrong CNBC editor Rick Santelli) have been arguing for years. Remember we’re talking about what could spook investors, who are hyper-focused on when the Fed will begin to raise interest rates. It is widely believed that the central bank will begin to nudge up rates at the beginning to the middle of next year. But if prices rise faster than expected, it may prompt the Fed to hike rates sooner and more aggressively than widely expected. If that were to occur, stock investors might take a time out from the bull market and wait to see how things shake out.
- DJIA: 17,100, up 0.9% on week, up 3.1% YTD
- S&P 500: 1978, up 0.5% on week, up 7% YTD
- NASDAQ: 4,432, up 0.4% on week, up 6.1% YTD
- 10-Year Treasury yield: 2.48% (from 2.52% a week ago)
- August Crude Oil: $103.13, up 2.3% on week
- August Gold: $1309.40, down 2% on week
- AAA Nat'l average price for gallon of regular Gas: $3.58 (from $3.67 a year ago)
THE WEEK AHEAD: The SEC is poised to impose new requirements on the $2.6 trillion dollar money-market mutual fund industry, when it votes on whether the riskiest money-market funds will have to let their share prices fluctuate; and charge investors withdrawal fees during times of stress. The government was forced to provide a backstop to money market funds during the 2008 financial crisis.
Haliburton, Hasbro, Texas Instruments, Netflix
8:30 Chicago FedNational Activity Index
Altria, Dupont, Kimberly Clark, McDonald’s, Apple, Microsoft, Coca-Cola, Verizon
8:30 Consumer Price Index
10:00 Existing Home Sales
AT&T, Boeing, Facebook, Pepsi
SEC vote on Money Market funds
Ford, GM, Hershey, Starbux, Visa, 3M, Amazon, Caterpillar
8:30 Weekly Jobless Claims
10:00 New Home Sales
8:30 Durable Goods
Within days of starting the third quarter of the year, U.S. stock market indexes were breaking records again and this time, they were also marking new milestones. The Dow Jones Industrial crossed over the 17,000 mark, nearly eight months after breaching 16,000 (the seventh-fastest 1000-point gain in the index's history); the Standard & Poor’s 500 was knocking on the door of the 2000-level; and 14 years after hitting the 5,000 level the first time around, the NASDAQ Composite seemed ready to recapture its old glory, just 12.5 percent below its record set in March 2000. You might think that the Wall Street cheerleaders would be out there celebrating with a noisy show, but something strange is going on…despite records, milestones and smart year-to-date gains, it’s eerily quiet right now, perhaps too quiet.
Investors are feeling mellow, according to the St. Louis Federal Reserve, which announced that its Financial Stress Index fell to its lowest level since the regional bank started tracking the data in 1993. Through the July 3rd close, the S&P 500 has gone 54 sessions in a row without closing up or down more than one percent, the longest such stretch since 1995. And the CBOE Volatility Index (VIX) -- often referred to as the “fear index” – closed at 10.32 just before the Independence Day weekend. To put that in perspective, the VIX soared above 80 during the financial crisis.
The VIX is down nearly 25 percent from the beginning of the year; is nearing its lowest level since 2007, when it fell below 10; and appears to be on path to challenge its all-time low of 9.31, reached on Dec. 22, 1993. Just because the environment seems calm, doesn’t mean that something bad is brewing. In fact there have been various periods when markets have been downright boring. But it would be unwise to let down your guard against the risks that are ever-present for investors, the biggest one of them all allowing your emotions to guide your decision-making.
A recent New York Times article called attention to something you probably already know: humans have physical reactions to extreme risk that can help protect us (touch that hot stove and your brain tells you pull it back in a hurry), but also can lead us astray. Author John Coates, explained that “under conditions of extreme volatility, such as a crisis, traders, investors and indeed whole companies can freeze up in risk aversion.” You may have experienced just such feelings in 2008 and 2009 and perhaps even sold everything in your portfolio to make those feelings go away.
The flip side of freezing up is getting lulled into a false sense of security. The current placid market conditions may allow you to gloss over the gyrations experienced during the financial crisis and subsequent bear market. Even more dangerous is the fact that a calm period can lead to a new round of risk taking. “When opportunities abound, a potent cocktail of dopamine — a neurotransmitter operating along the pleasure pathways of the brain — and testosterone encourages us to expand our risk taking.”
Because human risk preferences can change as market conditions shift, you may be wondering, “How can I protect myself from myself?” The answer is clear: to adopt a diversified investment strategy that incorporates your risk tolerance, time horizon and financial goals. Let me state unequivocally: the strategy does not work perfectly in the short-term. When markets crashed in 2008 and 2009, almost every asset class plummeted in unison, and in the first half of this year, everything from stocks to bonds to commodities increased in value.
That said, asset classes might gain or lose value simultaneously for a period of time, but typically not by the same magnitude and not over a longer time horizon. During times of crisis or times of extreme calm, you may question the benefits of diversification. When you do, remember that when markets are either very noisy or quiet, the subsequent period may be far less so. Stick to your game plan – you will be happy that you did!
Talk about good luck—I was coincidentally in London, just as the Bank of England created a stir in the financial world! Last Thursday, Bank of England Governor Mark Carney said interest rates in the U.K. could rise sooner than investors expect. The statement was the clearest evidence that Britain’s five-year period of record-low borrowing costs is drawing to a close, perhaps portending the same for other central banks. While the British economy is in a different situation than its former colony across the pond, (parts of the empire are facing skyrocketing property prices), investors immediately extrapolated the British position and applied it to future Federal Reserve action. The analysts’ at Capital Economics note that eventually, “central banks may correctly decide that economies no longer need the support from ultra-loose monetary policy or that the benefits no longer justify the costs and risks. This point may still be a few years off, but we suspect that US interest rates in particular might return towards more normal levels at a faster pace than currently anticipated.”
This Wednesday, the Federal Reserve convenes its two-day policy meeting, where it is expected that officials will announce another $10 billion cut to their bond-buying program, reducing monthly purchases to $35 billion. Since the financial crisis, the Fed has bought more than $3 trillion worth of government and mortgage backed bonds, in an effort to inject money into the banking system; to lower long-term interest rates; and to stimulate overall economic activity. Eventually, those securities will come off the Fed's balance sheet as they mature or the central bank sells them, but that process could take years.
The central bank is also expected to keep short-term interest rates near zero, where they have been since the height of the financial crisis in December 2008. This meeting will also feature Fed projections about economic growth, unemployment and the future course of rates. The day will conclude with the main event, a press conference with Chairman Janet Yellen, where some expect her to mention concern about investor complacency. As mentioned last week in this space, the VIX, a measure of expected stock-market fluctuations, has been below its long-run average for nearly a year and a half—that’s a string of steadiness not seen since 2006 and 2007, before the financial crisis and recession. Of course it goes without saying that extended periods of low volatility can themselves increase the chances of bad events occurring.
MARKETS: Stock indexes fell for the first time in a month and oil increased, as violence escalated in Iraq. Iraq is the world’s eighth-largest producer of oil and ranks number two in OPEC countries, behind Saudi Arabia. Iraqi production has been on the comeback trail since the height of the Iraq war, hitting 3.6 million barrels a day in February, its highest level in more than 30 years. Since then, it has since fallen to 3.3 million barrels a day in May. Any protracted events in Iraq could impact oil production and prices.
- DJIA: 16,775, down 0.9% on week, up 1.2% YTD
- S&P 500: 1949, down 0.7% on week, up 4.7% YTD
- NASDAQ: 4,321, down 0.2% on week, up 3.2% YTD
- 10-Year Treasury yield: 2.6% (from 2.58% a week ago)
- July Crude Oil: $106.91, up 4.1% on week
- August Gold: $1252.50, up 1.7% on week
- AAA Nat'l average price for gallon of regular Gas: $3.66 (from $3.63 a year ago)
THE WEEK AHEAD:
International Monetary Fund releases its annual review of the U.S. economy
8:30 Empire State Manufacturing
9:15 Industrial Production
10:00 Housing Market Index
Fed begins 2-day policy meeting
8:30 Housing Starts
8:30 Consumer Price Index
2:00 FOMC decision and econ projections
2:30 Fed Chair Yellen Press conference
Amazon expected to unveil a new smartphone
8:30 Weekly Jobless Claims
10:00 Philadelphia Fed Survey
Quadruple Witching: The expiration date of stock index futures, stock index options, stock options and single stock futures. Because investors must close out of their positions, there is often an increase in trading volume.
The economy created 217,000 jobs in May and the unemployment rate remained at 6.3 percent. With this report, the US economy reached a milestone: Five years after the end of the recession, total employment is finally above the pre-recession peak, which means that we have FINALLY recovered 8.7 million jobs that vanished from 2008 to 2010. Total employment is now 98,000 above the previous peak and at a new all time high, although this obviously does not take into account that the labor force has grown substantially since the recession started in December 2007. That said, let's take milestones when theu come along! The May results also mean that after the severe winter, the job market remains on an upward trajectory. Over the past three months, job creation has average 234,000, ahead of the monthly job growth seen over the past year of 197,000; and through the first five months of the year, the economy has added just over a million jobs, slightly ahead of last year’s pace despite the winter woes.
There was even a smidge of good news about the labor force -- after that massive 806,000 decline in April, it increased by a modest 192,000 in May. Still, the participation rate (the number of people working or actively seeking employment) remains at a 36-year low of 62.8 percent, which not exactly a sign of a robust economy. Since the start of the Great Recession in December 2007, the labor force participation rate has fallen by more than three percentage points.
One of the things missing from this recovery has been an increase in wages. Average hourly earnings increased by 0.2 percent in May from April, pushing up the annual growth rate to 2.1 percent from 1.9 percent a month ago. This is just the kind of gradual increase in wages that the Federal Reserve is hoping to see – not too slow to indicate a problem, but not so fast that the central bank has to worry about an inflationary spike. The May jobs report shows enough economic progress that the Fed can continue to slowly reduce its bond purchases by the end of the year. Still, with 9.8 million Americans out of work and many more under-employed, there's no doubt that the nation is still struggling to get back its employment mojo.
Speaking of milestones, in the “you may have missed it category,” US household net worth surpassed the pre-recession peak and topped out at $81.8 trillion in the first quarter, according to the Federal Reserve's Q1 2014 Flow of Funds report. That move higher has been powered by a doubling of stock indexes and an improving real estate market. Bill McBride at Calculated Risk notes "Although household net worth is at a record high, as a percent of GDP it is still slightly below the peak in 2006.”
MARKETS: The CBOE Volatility Index (VIX, aka “the fear index”), an options-based gauge of expected swings in the S&P 500, closed at a 52-week low of 10.73 and its lowest finish since February 23, 2007, when it closed at 10.58. It seems like forever ago, when the VIX closed at its all-time high of 80.86, but actually it was only 5 1/2 years ago, on November 20, 2008. Have we returned to the sort of complacency and risk taking that produced the financial crisis? According to The Economist, there are some warning signs: “Issuance of poorly-rated ‘junk bonds’ has risen sharply, as have loans to already highly indebted firms; former pariahs like Greece can now borrow at single-digit rates.” As you celebrate market highs, tread carefully…
- DJIA: 16,924, up 1.2% on week, up 2.1% YTD
- S&P 500: 1949, up 1.3% on week, up 5.5% YTD (18th closing high of year)
- NASDAQ: 4,321, up 1.9% on week, up 3.5% YTD
- 10-Year Treasury yield: 2.58% (from 2.47% a week ago)
- June Crude Oil: $102.66, down 0.05% on week
- August Gold: $1252.50, up 0.5% on week
- AAA Nat'l average price for gallon of regular Gas: $3.67 (from $3.61 a year ago)
THE WEEK AHEAD: Retail sales will be the main event on the economic calendar, with expectations of a robust monthly gain. Sen. Elizabeth Warren (D-MA) has proposed a bill to address America's $1 trillion student debt problem. Democrats plan to bring it to a floor vote this week. The bill would allow students and families who previously borrowed at higher interest rates to refinance their loans at the lower rates available to students who borrow now.
7:30 NFIB Small Business Optimism Index
10:00 Job Openings and Labor Turnover Survey (JOLTS)
8:30 Weekly Jobless Claims
8:30 Retail Sales
8:30 Import/Export Prices
10:00 Business Inventories
9:55 Consumer Sentiment
During his May 22nd testimony on Capitol Hill, Fed Chairman Ben Bernanke dropped a bombshell when he said that the Fed could pull back on its bond buying “in the next few [FOMC] meetings,” depending on prevailing economic data. Many investors interpreted the comment as a hint that the Fed’s stimulus was coming to an end. Remember that the Fed keeping interest rates low has spurred many investors into stocks, because they seemed preferable to cash, bonds or commodities. If rates start to rise, that decision may change. Guess what? Things are changing!
In the US, stocks are only down about 2 percent from the intraday high on May 22nd (now dubbed "B-Day" for Bernanke), but other markets are down more dramatically: bonds plunged about 7 percent; emerging market stocks have tumbled 10 percent; emerging market currencies are off sharply; and Japanese stocks have sunk 15 percent from recent highs.
With markets on a seemingly-unending daily roller coaster ride, here’s what you should do: NOTHING. This prescriptive measure is geared towards investors who have been sticking to their game plans and rebalancing ever quarter or so. If you are in that category, please sit still and don’t do anything.
But if you have been flying by the seat of your pants, use this market volatility as an opportunity to review where you stand, create a target allocation and force yourself to rebalance according to your goals.
Here are 6 more tips for every investor:
- Dont let your emotions rule your financial choices. There are two emotions that tend to overly influence our financial lives: fear and greed. At market tops, greed kicks in and we tend to assume too much risk. Conversely, when the bottom falls out, fear takes over and makes us want to sell everything and hide under the bed.
- Maintain a diversified portfolio. One of the best ways to prevent the emotional swings that every investor faces is to create and adhere to a diversified portfolio that spreads out your risk across different asset classes, such as stocks, bonds, cash and commodities. (Owning 5 different stock funds does not qualify as a diversified portfolio!)
- Avoid timing the market. Repeat after me: “Nobody can time the market. Nobody can time the market.” One of the big challenges of market timing is that requires you to make not one, but two lucky decisions: when to sell and when to buy back in.
- Stop paying more fees than necessary. Why do investors consistently put themselves at a disadvantage by purchasing investments that carry hefty fees? Those who stick to no-commission index mutual funds start each year with a 1-2 percent advantage over those who invest in actively managed funds that carry a sales charge.
- Limit big risks. If you are going to make a risky investment, such as purchasing a large position in a single stock or making an investment in a tiny company, only allocate the amount of money you are willing to lose, that is, an amount that will not really affect your financial life over the long term. Yes, there are people who invest in the next Google, but just in case things don't work out, limit your exposure to a reasonable percentage (single digits!) of your net worth.
- Ask for help. There are plenty of people who can manage their own financial lives, but there are also many cases where hiring a pro makes sense. Make sure that you know what services you are paying for and how your advisor is compensated. It’s best to hire a fee-only or fee-based advisor who adheres to the fiduciary standard, meaning he is required to act in your best interest. To find a fee-only advisor near you, go to NAPFA.org.