Last year I transferred funds from a money-market account to a stock mutual fund where it's earned a nice return. But now I'm wondering whether I should move it back again or let it ride. What do you think? -- Chris G.
I think you need to reevaluate your approach to investing.
Given the way the stock market's been jumping around lately -- stomach-wrenching dives, followed by dramatic rebounds -- I can understand why you're not sure whether to stay or go.
On the one hand, the U.S. economy seems to be cruising along nicely. So this bull market may have more room to run. At the same time, the recent drop in oil prices and ultra-low yields on U.S and foreign government bonds may be signaling slower growth abroad and potential losses for the U.S. stock market ahead.
But guess what? The future path of stock prices is always uncertain. You can never know for sure how the myriad forces pushing and pulling at the economy and financial markets will play out. And people who think they do are fooling themselves.
For example, the market got off to a rocky start last year when jitters about emerging economies and a weak manufacturing report in China sent stocks on a slide that left the Standard & Poor's 500 index down roughly 6% as of early February. Anyone who bailed and stayed out of stocks would have missed a double-digit return for the year.
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That's not to say that investors who stuck with stocks didn't endure a bumpy ride. After that initial hiccup, the market slipped by 4% or more four more times en route to its near 14% 2014 gain.
The point is that trying to outguess the market is futile. Clearly, there are going to be serious setbacks in stock prices. Since World War II, we've had eight major downturns averaging nearly 39% and lasting an average of 19 months.
But predicting whether a dip in prices like we saw last week is the prelude to a meltdown or a false alarm from which the market will recover and march to new gains is virtually impossible.
So rather than guessing whether to stay or bolt, you're better off developing an actual investing strategy -- namely, building a diversified portfolio of stocks and bonds you can live with through all sorts of market and economic conditions.
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Start by assessing your appetite for risk, which you can do by completing this risk tolerance questionnaire. Based on how you answer such questions as how long you intend to keep your money invested and how much of a loss you can stomach before selling off investments, you'll receive a suggested mix of stocks and bonds.
You'll also see how that recommended mix performed over previous decades, as well as how it did in its best and worst years. In other words, you'll get a sense of the potential upside, downside and long-term average.
Once you've settled on a stocks-bonds blend you're comfortable with, avoid the natural instinct to start investing more heavily in stocks in an attempt to grab bigger gains when the market is soaring or tilting your portfolio more toward bonds for greater protection when stock prices are falling (or seem ready to plunge).
Indeed, the reason for setting your asset allocation in the first place is to prevent you from giving in to emotions and instead maintain a consistent tradeoff between risk and return. So aside from periodically rebalancing your portfolio to bring your mix back to its original proportions, you largely want to resist the urge to move your money based on the shifting investment winds.
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As for choosing investments for your portfolio, you can create a perfectly well-rounded portfolio with just a few funds, or even one fund.
And, in fact, keeping it simple is the better way to go. If you lard your portfolio with all manner of funds and ETFs that engage in arcane investing strategies or invest in obscure corners of the market, you'll more likely end up diworse-ifying than diversifying. You'll also probably shell out more in fees.
But the biggest advantage to following the approach I've outlined is that you'll come away with a disciplined investing strategy, and a portfolio that will give you a reasonable shot at solid long-term returns without taking unnecessary risk. So you won't have to engage in that futile "Should-I-stay-or-should-I-go?" guessing game ever again.
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