Ellen Schultz has a good article in the Wall Street Journal about people who were scared out of the market and are now sitting in cash, frozen by fear. She puts the dilemma this way
Most people—if they hope to maintain their standard of living in their old age—know their savings will need to earn more than the roughly 0.5% interest that most bank accounts pay these days or the 1.85% they would get from a five-year “jumbo” certificate of deposit.
Still, it is a risky time to invest. Stocks are flirting with record highs. Interest rates have nowhere to go but up, which will cause bond prices to drop.
Though getting better returns is essential, telling skittish investors to jump back into the market now feels like advising drivers to steer into a skid. But experts have some suggestions to help people get behind the wheel, while minimizing their risk of crashing and burning.
We know how you feel. We never got out of the market so we don’t have this problem but we do get questions from people who were badly burned by the markets in 2000 and 2008. There are some people who should simply not be in the market. They are psychologically unable to cope with the ups and downs and are better off hiding their money under a mattress (or putting it in the bank which at today’s interest rates is just about the same thing).
But for those who have investable funds, there are a few things that can be done.
- Schultz refers to “multi-asset funds.” This is a way of buying a diversified portfolio with one fund. The problem with this is that while the goal is exactly right, the vehicle is often one of those mediocre hybrids that does nothing well. At Korving & Co. we prefer to custom build your own diversified portfolio using the best fund in each of its classes.
- She also suggests “equity income funds” which is a variation of her first suggestion. See my comments from the first point.
- Finally she suggests “dollar cost averaging.” From the aspect of investor psychology, this strategy is actually a good one because people feel they are dipping their toe in the water rather than jumping in. Statistics studies have shown that the total return over a long period of time is actually not as good, however, we think that it’s probably a good way to go for the really skittish investor.
If you have been on the sidelines waiting for someone to ring the bell telling you when to get in, it’s not going to happen. In you need a little help, call us.