Are You Afraid of the Financial Markets?

Recent polls have indicated that a large percentage of people pulled their money out of the stock markets following the severe declines of 2008.  This means they would have missed out on the near doubling of general markets from the lows.  At the same time, many of these people placed their money in bonds or emerging markets, since both of those asset classes held up better, only for those to underperform in the early part of this year.  In addition, with recent geopolitical events, oil prices and commodity prices have moved up sharply and gold and particularly silver seem to be on a hot streak.  It’s enough to make your head spin.  In fact, in speaking to some of my friends, it made their heads spin and they shifted their retirement accounts into low-yielding, low volatility money market funds (earning less than one percent per year, but with minimal risk of principal declines).  Making sharp asset allocation moves is almost always a bad thing, especially because you have too much emotional connection to your own savings and investment accounts.  Unfortunately, with company pensions nearly extinct, most people will have to make their own decisions.  Here are some suggestions:

–Find a target asset allocation that appears to do well in the long-term –  These should have some weight toward the major asset classes: domestic stocks (if you are in the US), international stocks and bonds.  Keep your emergency funds in low-risk money market or bank CDs.

–Move toward a policy of monthly payroll allocations for your investment and retirement accounts, if possible automate this — with constant gyrations in the marketplace, very few people can be good at timing the market.  Most will be better served by having a monthly auto-invest plan.

–Do not check your balances everyday — this usually leads to too much tinkering and transactions costs.

–Manage that which you can control — for example, having funds with very low fees, having an overall tax advantaged strategy, or signing up for employee match programs.  These will add up in the long-run.

–Do not spend too much time reading financial advice that takes the form of predictions of the end of the world. I believe everyone should become better educated on personal financial management, but too many of the recommendations are very short-term oriented and will leave you whipsawed.

shared at this week’s Carnival of Personal Finance