First appeared in USA Today and The Indianapolis Star
My co-worker thinks we’re on the verge of a major stock market crash. If he’s right, what should I do with my 401(k)? With only 20 years until I retire, I don’t want to lose money. My wife and I both agree that he’s right, and we’re due for another recession. What do you think?
— Vince, Corpus Christi
There’s something about non-work conversations with co-workers which makes them seem oddly important.
Since we spend so much time with these people, their words can take on quite a bit of credence. I once had a co-worker who made a definitive sandwich-ranking chart, in which the Reuben beat out the Cuban sandwich, although most of us were convinced he’d just never had a good Cuban. He wasn’t a sandwich expert, but he seemed to know what he was talking about. He spoke with such confidence. That was until I saw him eating a wrap one day for lunch. We lost all confidence in him after that.
I’ve received a form of this question at various times over the past 15 years or so. There are so many micro-elements to the question that it’s difficult to stay focused on what’s important. I could focus on taking advice from co-workers in areas in which they aren’t experts. I could focus on stock market predictions in general. Or I could even focus on the validity of your co-worker’s assertion. But today, we’re going to focus on detours.
I decided long ago that making stock market predictions was silly. Even if you did know exactly when to jump out of the market and go into cash, you wouldn’t know when to go back into the market as it climbs back up. For instance, let’s say you bailed on Oct. 24, 2008, which was the last big crash. Since that day, the S&P 500 is up over 150 percent. Jumping out of the market on or around that date, without the exact knowledge of when to jump back in, would have yielded horrific results, compared to just staying in the market.
Individual investors aren’t the only ones spooked. I know a rather successful money manager who’s been screaming about the sky falling for eight years. As a result, he’s kept a ton of money on the sidelines while the market has climbed to all-time highs.
Vince, your question is about detours, not predictions. From time to time, our money takes a detour. The destination doesn’t change. Your desire to get to the destination doesn’t change. The only thing that changes are the roads.
For a moment, imagine that you and your family are driving from Corpus Christi, Texas, to St. Louis, Mo., for a vacation. It’s about a 15-hour drive. Seven hours in, traffic comes to a standstill. All of the sudden, emergency crews tell you to exit the interstate and find an alternative route. You're frustrated, scared, and you have no idea where you’re going. Do you pull over and just sit your car? Do you turn around and drive home? Or do you just deal with it?
With 20 years left, you have plenty of time to get to St. Louis, Vince. I highly recommend you interview two or three financial advisers, and hire one to keep you on track.
A word of warning, though: Don’t choose the one that stokes your market fears. Navigating the investment world is hard enough without fear and greed influencing your decisions.
Having written a column like this in the past, I know what’s next. My inbox will be filled with emails from financial advisers who say they can predict the market and emails from investors who’ve gotten burned by the market. Is it possible the two types of emails are related? Yeah, I think so, too.
When you talk to your new investment adviser, ask them to tell you what annual rate of return your retirement goal requires. In other words, can you achieve your retirement income goals by only achieving say 5 percent per year?
If so, dial back your risk to that level. Your goals, plus their math, is what makes for a beautiful client/adviser relationship. Consider telling your co-worker to do the same thing. Who knows, he might just be the sorta person who takes advice from co-workers.
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