On dropping and stopping

Just when you thought it was safe to relax and enjoy the news that the US and Israeli markets had returned to their pre-2008 meltdown levels of five years ago, along come those annoying naysayers, proclaiming ‘the end is near’.

For the past three years the Israeli market has been in a sideways motion, with rises and falls essentially cancelling each other out.  However, over the past four to five months it has come to life, showing significant gains.  Trading volumes have gone up, and indexes are reaching or breaking all-time highs.

The situation in the US markets has been quite different, rising steadily over the past five years.  The proactive involvement of the US government and central banks around the world has undoubtedly had a very positive impact on the growth of the stock market in recent years, but the end results are still unknown.  The Fed is just now slowing down its money printing press, reducing purchases from $80 billion to $70 billion per month.  Returning to “normal” monetary conditions has the potential to impact tremendously on the market.

Will the US stock market soon start a downward trend and/or spiral (causing a domino effect on many other markets worldwide), taking with it people’s hard-earned savings?  Is now the time to cash in your stock market investments with savings and profits intact?

As an investment manager, and not a prophet, unfortunately I do not have the answers to the above questions, and the myriad others along similar lines.  However, I do know that it is crucial that your investment portfolio to be aligned with both your short and long term needs.  Most people know that having too much risk in their portfolio as they approach retirement can lead to disaster (just ask those who retired in January 2009 after the market showed a 50% loss the previous year).   What people sometimes don’t realize is that taking too little risk can also lead to long term financial troubles.  If your money is sitting in a bank account earning next to nothing, while inflation is average two to three percent, your money is losing value.  And what if you need your money to grow over the years in order for you to reach your retirement or savings goals? Not much chance of achieving that with little or no growth.

So what does all this mean for the average investor?  In general, when the buzz is all about how strong the market is, an investor usually increases his exposure to riskier elements of his portfolio, pushed along by the euphoria of the market.  But market momentum or general sentiment is never the best way to decide how to invest your money.

And to make the situation even more uncertain, for every pundit who assures you that the market still has a long way to rise, there is another professional warning of the end of the bull market.  Who do you listen to?

Private investors can’t follow the market in the same intense way as the professionals, who are tied to their phones and screens, following every hiccup in the financial world.  However, the single most important thing you can do is ensure that your portfolio is aligned to your risk preferences, investing time horizon and liquidity needs.  A well-thought out plan that carefully assesses your risk profile and constructs a portfolio to match your long term needs is critical to long term success.

Everyone knows that playing the stock market has elements of a gamble.  Are you comfortable with the level of risk you are currently taking?  If the markets were to drop steeply, and you lost a considerable percentage of your investment wealth in the short term, could you cope financially?  Would it cause you to panic?

Your investment portfolio must be based on your age and stage in life.  The closer you are to retirement the less able you are to swallow the short term loss of your retirement assets.  So make sure that you aren’t risking your quality of life in what should be your golden, financially stress-free years.  When investors take on increased risk either based on false optimism, or because they are forced to (due to a lack of reasonable options), caution is often tossed into the wind.

Regardless of who the false prophets are – the naysayers or the yea-sayers – make sure you haven’t left yourself open to financial disaster because you wanted to hang on in the stock market just that little bit longer.