The Dow took a big plunge Wednesday. It was down 2 percent, fueled in part by investor concerns about the so-called fiscal cliff and worries about Europe.
And, while some financial advisers say this may be just the beginning of a rough ride, they also say it’s no time to panic. “If you let the markets guide your investing decisions, then you are simply reacting,” says valley financial ad visor Michael Phillips Black.
But he is quick to add that does not mean you should sell everything every time the market rises or falls on events like elections, or even budget deliberations. “The markets can be irrational,” he tells us.
If you need proof of that, says Black, just look at foreign and U.S. stock trends all summer long. “Both of these are showing five to 15 percent increases in value over this last year,” he points out.
And while Black says that was good news for those who were heavily invested in stocks, it could be bad news for those who are not paying attention now. “In the last 24 months, the economy has been declining around the world,” he says.
Even in the United States, the economy has grown by an anemic two percent. So while investors were betting on faster growth, renewed consumer spending, and better returns to push the market up, the economy hasn't delivered.
“Whenever you have a disconnect like that, where markets are improving and the economy is not,” cautions Black, “something has got to change.”
And he believes that something will not be good. “We are not suggesting a market crash is imminent, we just see elevated risk.”
But that doesn't have to be bad for you or your savings, he adds. “Investors have the option of taking risk off the table. Move out of stocks. Move to safe havens, bonds, for short term, cash.”
Black says as a very loose rule of thumb, your allocation of stocks should be 100 minus your age. In today's environment, he believes less stock is better. “Within 401ks, you have a menu of options. Always include a money market and bond fund,” he advises.
And Black says you can't stay and hold out of stocks either. Getting back in is as important as getting out. Again, the economy is your guide.
“So watching our economy pick up through improvement in GDP. It is currently two percent. And watching unemployment come down. Those are an indicator that our economy is improving, which means a more valid reason to own stocks or increase your allocation to them. Until that happens and with everything else going on in the world, you can take risk off the table by reducing stocks.”
Again, Black says don't panic and sell everything today. He expects we'll see some big swings in the short term, maybe even a post election bounce. But he says investors can’t look at news headlines to drive their actions.
He believes now is the time to start moving more money out of stocks and stock mutual funds and into other options like bonds and money market funds, because the economy is not performing to levels to match the markets, and that is risky. Reducing dependence on stocks reduces risk.
You can reach Michael Phillips Black at www.mpblack.com.