A bear to remember
It's easy to forget how painful market crashes can be, so hang on to your memories of this one.
(Money Magazine) -- Back in March, when stocks were plunging to new, 12-year lows, you probably came down with a major case of PITS: plummeting-investment trauma syndrome. The symptoms: nausea and depression whenever you thought about your shrinking nest egg.
But with stocks rallying lately, some of that queasiness may be going away. Don't let it. In fact, now is the perfect time to document what a scary ride you've been on, and to preserve those memories for the next bull market.
Why? As a financial planner, I know how short an investor's memory can be. Think back to the last bear, when U.S. and foreign stocks lost about 50% between 2000 and 2002. That was the first time folks joked that their 401(k)s were 201(k)s.
Yet it wasn't long after that slide ended that rampant risk taking re-emerged. Many otherwise sensible folks started diving blindly into the riskiest areas of the market, while others put the vast majority of their portfolios into stocks even if they didn't need to.
The lesson from that experience, in the words of White House chief of staff Rahm Emanuel: Never let a major crisis go to waste.
What's the best way to do that? Here are three steps that can help.
Keep a diary. Write down how much your net worth shrank and how it made you feel. If you can record yourself on video, even better.
Write out a simple investment policy statement. "I understand that stocks are risky, and I now realize that losing money feels like getting hit in the head with a hammer. For the next 10 years I will not let my portfolio vary by more than five percentage points from this allocation: Stocks ____%, Bonds ____%, Cash ____%"
Keep in mind this is a long-term statement. The last thing you want to do is overreact and become too conservative after a major crash.
Ask a friend to keep you focused. Friends don't let friends drive their portfolios off a cliff. So give a copy of your investment policy to a pal or relative you trust, in an envelope marked: "Open when the S&P hits 1200." That way, when the next bull is raging and you're thinking of jumping into Russian Internet stocks, you'll be reminded of just how painful investing can be.