Age alone doesn’t kill the bull. Of course I am talking about the stock market. The bull market is over 10 years old and it’s been a great ride. On March 9, 2009 the Dow Jones Industrial Average closed at 6,547, today it is over 27,000. Those of you that have retirement plans and other stock investments have seen unprecedented gains.
So when will it end? All of the experts have an opinion but no one really knows. Individual investors trying to guess or time the selling or buying of stocks will only get themselves in big trouble. For example you hear a great commentary on TV or read on-line about the coming market crash that scares you into taking almost all of your money out of stocks. Then the market continues to climb. Now what do you do? You see you were wrong and everyone else is making money so you get back in at a much higher place than you got out just in time for a 20% market correction. Now you are really taking huge losses so you get out again and then the market goes up and you start the cycle all over again.
You may laugh but people do this all the time. But because the market has done so well in the last 10 years investors haven’t really had to make any decisions. Many are just not paying attention to their investments. You should be focusing on how much risk you are taking along with those big gains. If you are still working and accumulating money for retirement and are relatively young you should stay fully invested in stocks. But if you are retired or approaching retirement you need to asses how much risk you are taking.
Why? Because you probably don’t want 100% of the money you need in retirement invested in the stock market. Over the last 10 years the portion of stocks in your retirement plan or portfolio may be much higher than you realize. This is particularly important for those approaching retirement. If you are 5 to 7 years from retirement you should have some kind of idea how much money you need to have so you can retire. If that money is suddenly cut by 30 to 50% it would probably affect your ability to retire. If your money is all in stocks losses like this will and have happened.
I talk a lot about asset allocation. It’s just a fancy phrase for how much money you have in stocks and how much you have in bonds. But it is the most important concept for investors because it determines the risk you take and the long term return you receive from your investments. If you are retired you are going to want less risk and a more stable value for your investments. That means adding bonds, CD’s or tax free bonds as an anchor. The typical retired investor probably should have 50 to 60% of their retirement assets in stocks and the rest in bonds. But if you haven’t been paying attention your allocation to stocks may be much too high because of the great stock market the last 10 years.
You may have been OK a few years ago but now you may be approaching 80 to 100% stocks. If the market corrects now you will have huge losses. If that happens it will scare you to death and you may panic and most likely take your money out of the market when it is way down causing you to lose a lot of money. The best way to avoid this mistake is to check your asset allocation a least once a year and rebalance if necessary.