By Brett Arends, MarketWatch
AFP via Getty Images
The Dow Jones Industrial Index /zigman2/quotes/210598065/realtime DJIA -0.57% plunged more than 7% Monday and a plunge in the S&P 500 /zigman2/quotes/210599714/realtime SPX -0.30% triggered a 15-minute halt as fears of an oil price war between OPEC and Russia sent oil prices tumbling. Analysts seeking safety fled into government bonds, pushing the yield on the benchmark 10-year U.S. Treasury plummeting 25.1 basis points to 0.43% — another all-time low. Yields and debt prices move in opposite directions.
“This is a great time to re-evaluate your true risk tolerance, which I don’t think can be gauged via software,” Jonathan Bednar, a financial planner with Paradigm Wealth Partners in Knoxville, Tenn., told MarketWatch when the most recent turmoil began on markets in the wake of the coronavirus epidemic. “If you are nervous then you may be taking on more risk than you are really comfortable with and should rebalance into a more conservative portfolio,” he said.
Studies have repeatedly shown that when that occurs, many ordinary investors found the losses too much to bear and sell stocks, often at or around the market lows.
The recent stock-market rollercoaster highlights the importance of knowing your willingness to take risk, financial experts say. They generally recommend owning fewer stocks as you get older, because you will have less time in which to recover from a long sell-off. Many investors may have grown complacent after 10 years during which the S&P 500 as more than tripled in value and some of their favorite stocks — such as Apple /zigman2/quotes/202934861/composite AAPL +1.61% and Netflix /zigman2/quotes/202353025/composite NFLX -2.53% — have been star performers.
Fidelity Investments, a major manager of company retirement plans, recently estimated that 23% of the investors in the 401(k) plans it manages were overinvested in stocks compared to their recommended levels, including 7% who had their entire 401(k) plan in the stock market. Among baby boomers, who are near or in retirement, 38% were overinvested in stocks, and 8% were entirely invested in the stock market.
Studies have repeatedly shown that when that occurs, many retail investors found the losses too much to bear and sell stocks, often at or around the market lows.
5 questions to ask your broker or financial adviser:
1. Are you taking on too much stock-market risk?
2. How would you react if the market kept falling?
3. Are you sensibly diversified?
4. Are your investments appropriate for your age?
5. Do your investments fit with your long-term financial goals?
For longer-term investors, the kind who don’t trade in and out of the market, the current sell-off is a reminder that stocks can go down as well as up, and not just for brief dips or panics. From the highs to the lows of the bear markets of 2000 to 2002 and 2007 to 2009, investors in the S&P 500 suffered losses of about 45%, even counting dividends.
It is more rational than it may seem. The risk for investors in a crash is that it gets a lot worse before it gets better, as it did in the U.S. in 1929-1933 and in Japan after 1989. Someone who has lost half the value of their retirement fund cannot afford to lose any more, especially if they are close to retirement and may be unable to keep working.
Meanwhile, those who own Treasury bonds have fared much better during bear markets. Treasuries, which provide steady income no matter what, tend to go up in turmoil when stocks go down. For example, the basic Vanguard Balanced Index Fund /zigman2/quotes/206672542/realtime VBIAX -0.09% , which is 60% invested in stocks and 40% in bonds, lost about 23% and 35%, during the turmoil of 2000-2002 and 2007-2009.
There are many theories about how to construct an “all-weather” portfolio that can protect against turmoil. They can include bonds, gold and other assets. The theories change, as markets and economies do. Long-term Treasury bonds, safe havens in past bear markets, offer far lower yields than they did in the past and, therefore, offer less protection in future market downturns than they have done previously.
But all mainstream theories of all-weather investing have one thing in common: avoid an overreliance on stocks, something that people often forget after the market has risen a long way, and often remember too late.