Avoiding Whiplash in this Market

If you read the financial headlines, you’re supposed to jump back into the stock market; or is it that you’re supposed to switch to less volatile bonds?  In today’s NYT, they have an article that seem unhelpful for most investors wondering if older investors should allocate more of their retirement savings to bonds. I think one of the problems with the financial press is that journalists and financial planners are often subject to the same problems that individual investors have, they are tempted to buy in up markets and sell in down markets.  This behavior leads to adding the exaggerated momentum moves of the market and encouraging investors to buy high and sell low.  I expect the markets to remain volatile over the next several months, but these are some things I do (or don’t do) in volatile markets:

–Avoid making buy/sell or asset allocation decisions when feeling panicked — most portfolios tend to lag when a bear market bottoms and turns around because of holding too much cash.

–Avoid listening to too much news – I find that the news tends to be very positive after the markets have run up and very negative after substantial declines.  Investment decisions should be the opposite.

–Position the portfolio to take advantage of big structural moves, not intraday trades.  As mentioned in a previous series of posts, I think that we are entering into a prolonged period of inflation which is not properly priced in to the markets.

–Set price levels to buy and sell, and try to maintain a discipline around them. (This is not easy).

–Remember that valuations still matter – I’m always surprised to find people who argue that investments have to do only with supply and demand and not the underlying asset.

see other posts at this week’s Carnival of Personal Finance