Q – For the past few years, I admit I’ve been just too nervous about investing in the stock market, because I’ve heard various market experts say that the economy is still weak and the stock market will not outperform. As a result, I’ve been holding mostly bond mutual funds and cash. Luckily, they’ve done okay. But now, with the big U.S. stock indexes like the Dow Jones Industrial Average climbing to record highs, I’m starting to wonder if I’ve made a mistake. Do you think I should switch out of bonds and invest in some good equity mutual funds? – Raj S., Georgetown, Ontario
A – The paradox here is that since its low back in March 2009, at the depths of the global financial crisis, the Dow Jones Industrial Average has advanced about 125%, crossing the record 15,000 mark recently. That record has been four full years in the making! Even Toronto’s resource-heavy S&P/TSX Composite is up 64% in the same period. Where have all the small investors been? In fact, they’ve missed another cyclical post-recession bull market.
The real question to answer here is not whether now is the right time to put money into stocks; rather, it is, “If you haven’t had exposure to the stock market over the past four years, why not?”
When clients ask me whether now is the right time to get into the stock market, I usually tell them thatanytime is the right time to get into stocks. In fact, you should always be in stocks. If you’re not, you’re doing something wrong. This usually gets some raised eyebrows and quizzical looks. Then I go on to say that you should also always be in bonds. And in cash. In other words, you should have a plan.
I’m talking here about proper asset allocation, one of the keys to success in personal money management. Basically, this means that you determine what kind of investor you are, what your financial objectives are, how much risk you can really withstand, and then create a portfolio of investments that reflects that profile.
You might, for example, be a growth investor – a little more aggressive in your outlook – and allocate, say, 10% of your portfolio to cash, 25% to fixed income, and 65% to stocks. And you’ll stick to roughly this allocation through thick and thin. You’ll always have a largeish portion of your holdings in equities, but you’ll also have bonds to help mitigate risk and provide income, while your cash gives you flexibility. Over the past four years, you’d have done pretty well with this kind of portfolio. And you wouldn’t now be wondering whether it’s time to “get into stocks.” You’ll already have been in stocks, reaping the gains along the way.
When you have a planned asset allocation strategy that you stick to, you’ll feel more comfortable weathering the inevitable stock market downturns. Yes, the equity portion of your portfolio will plunge right along with the market. But your bond holdings are likely to soar, offsetting losses in equities. That’s called mitigating risk.
And that’s why I tell clients they should be in stocks, bonds, and cash at all times, instead of switching in and out of assets at random based on the headline of the day. It’s a matter of degree – allocating your asset mix according to your objectives and tolerance for risk. Investing is a long-term business, and you’ll have a much greater chance of success in the long term if you have a plan…and stick to it. – Robyn