After more than a year of steady gains, stock markets became suddenly volatile and tumbled sharply (relative to market action over the past year, not the panic in late 2008 and early 2009) today. It is foolhardy to assert that this is the start of the new bear market that so many seem to be expecting or that stocks will continue to trend higher. Since there will be no shortage of pundits confidently stating one case or the opposite, investors might wonder what exactly they are supposed to do. Here are some suggestions:
Remember risk: While stocks can go up like a rocket, they can just as easily head in the other direction. If they do, do you have the resources to ride out a decline? If not, you may have too much allocated to stocks. Even if you have the ability to bear risk, do you have the stomach? If you experienced sleepless nights and temptation to abandon stocks altogether in the bear market of 2008-09, you may again have too much exposure to stocks.
Raise some cash: In the latest Berkshire Hathaway annual report, Warren Buffett encouraged investors to reach for a bucket instead of a thimble when it is raining gold. While I found myself investing regularly at the early stages of the 2008-09 bear market, I ran out of buckets when it really started to rain gold. So, one of my lessons from the Great Crash was to keep plenty of cash around to take full advantage of rare market opportunities.
Rebalance, if necessary: While Canadian stocks have rallied strongly over the past year, other asset classes may not have kept pace. Gains in US stocks were negated by the rise in the dollar and European stocks suffered a double whammy of Canadian dollar appreciation and a falling Euro. Increasing bond yields meant bond prices have moved in the other direction. Given all this, your portfolio allocations might have deviated from your targets and it may be time to rebalance.
Stay the course: Assuming you have assembled a portfolio that is appropriate for your circumstances and temperament, the best course of action might be to do nothing. It is tempting to constantly tweak the portfolio in the face of every little move in the markets but that is likely to be counterproductive for retail investors.
Of course, all this is easier said than done and none of this is really new but nevertheless, there is some value in reiterating the basics every now and then.