In October, when the stock market went into free-fall, I did the sensible thing. I panicked. I e-mailed the adviser who manages my retirement money: “OMG, have I been too heavily in stocks? Should we get some of it out, before things get worse? Help!”
I realize that people like me aren’t supposed to send e-mails like that, but I couldn’t stop myself. My brain told me, “Follow your system; history says it works.” My gut cried, “Are you crazy? Save what you can!”
Fear makes you stupid. To be on the other end of unhinged e-mails like this is what advisers are for. Mine reminded me about crises past and how stocks had recovered. Still, under his calm, his gut was screaming, too. “It’s a dangerous time,” he couldn’t stop himself from saying.
Besides my retirement account, I have a taxable account that I manage myself. Both are invested in low-cost, no-load mutual funds, allocated across various types of securities. Both are rebalanced periodically to maintain their original allocations. I should be weathering this shock as I did all previous ones: make regular contributions, rebalance and wait.
But this is the kind of collapse that sends you back to first principles. Were my allocations right in the first place? Stressed financial planners are asking themselves the same thing.
Take the question of safety. Planners traditionally have said, “Keep money safe if you’ll need it within two or three years,” for expenses such as tuition, taxes, buying a house or future daily bills. Money you won’t touch for longer periods can go into riskier investments, for higher returns.
That worked fine in the three market cycles during 1980 to 2000. After stocks dropped, it took less than two years for them to recover their previous peaks.
By Jane Bryant Quinn
Source: Newsweek.com
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