With the stock market seemingly reaching new highs on a daily basis, so too does the anxiety of many investors. Economic numbers at home and abroad suggest to us that investors simply stay the course. However, recent headlines paint a very different picture, shouting: “EU Stock Market could CRASH and BURN,” “Stock Markets Across the Globe are Set for Devastating Crash” and “The U.S. Stock Market on Course to Crash.” While such headlines may seek to protect investors from losses that might decimate their portfolios, they can actually do more harm than good — pushing investors to sell and potentially miss out on future gains, or, worse, keeping individuals from investing in the markets in the first place.
We’re starting to see and hear such fear from the investors we talk with, as memories of devastating stock market losses in 2008 and early 2009 have faded but not diminished completely. Some with cash on the sidelines may be hesitant to invest, for fear they will be buying at the top of the market. Others with gains may be looking to lock them in, for fear of losing profits. In many cases, the positive headlines we’ve seen, including “Warning of stock market crash out of whack with reality,” “Market melt-up could push stocks to new records” and “The stock rally continues…” seem to be summarily dismissed.
Investors need to find a balance they’re comfortable with (both when selecting what to invest in and deciding whether to invest at all). Investors shouldn’t ignore their fear. Risk tolerance is a major factor to consider, and fear of loss goes a long way in determining that tolerance. But the decision to invest doesn’t have to be all or nothing.
In fact, an investment portfolio made up entirely of stocks or stock mutual funds is appropriate for just a small sliver of the investing population. A diversified mix of stocks, bonds, alternatives and cash is generally more suitable for a broader range of investors. And while such a mix doesn’t pack as big a punch, or have the same “brand” appeal as Netflix or Amazon, it also doesn’t carry the same risk. The risk side of the equation drops faster than the return side as stock exposure is reduced. Indeed, a portfolio with just a modest amount of stock exposure still has the potential to deliver mid-single-digit returns over the long term, while carrying considerably less risk than owning a portfolio of individual stocks or even stock mutual funds.
In reality, no one knows when the next stock market correction is coming. But investors do know when they are looking to retire or when they will be paying for college. In contrast to time horizon, emotional risk tolerance isn’t always as cut and dry. But investors can start by considering the size of loss they can tolerate. With that information, along with a given time horizon, an appropriate level of diversification and risk can be determined.
Doomsday headlines are hard to ignore, but they shouldn’t keep investors on the sidelines earning less than 1% in a savings account, when better returns may be available without all the risk that the headlines imply.