Learn from the Mistakes of Other Individual Investors: Don’t destroy yourself. Part 2

Why do so many individual investors have ants in their pants? Why do so many investors make the wrong moves, switching in and out of funds and stocks, many of them quite good if held for the long term?

Many investors haven’t forgotten 2008.

In 2008, the average investor was hammered. Most indexes lost 40 percent. Trillions of dollars evaporated.

Chris Brightman, a market pro with Research Affiliates, warns that indexes were then overconcentrated on a small number of huge tech stocks and that a similar overconcentration in a few big overpriced stocks is developing.

“I think anyone with a memory that goes back more than a decade and a little bit of curiosity would find striking parallels between today’s environment and the late 1990s,” Brightman says.

“Can the market crash? Absolutely,” adds Brightman’s colleague, Vitali Kalesnik, head of equity research at Research Affiliates.

Then markets seemed strong, most investors and advisors were optimistic. Few projected the next decade would be horrible, including several crashes.

Neither Kalesnik nor Brightman will give a time for a crash, but say the market is unusually risky.

Brightman is not alone in sounding a bubble alert.

Bubbles Are Brewing, They Say

Danielle DiMartino Booth, a former Federal Reserve adviser, and Hunter Lewis, co-founder of investment consultant Cambridge Associates, believe the Fed’s easy money policies could blow up.

“We’re overdue,” Booth says.

“The potential is there because the central banks have yet again created another bubble,” Lewis says.

How?

“The parallel to 2007-2008 cannot be dismissed because of the incredible run up in debt,” Booth says.
Booth warns that “there has been more leverage” in this current run-up than in 2007.

“This is worse than before the 2008 crash, she adds, because it (the Fed) has persuaded other central banks to follow its policies.

Now the Fed is beginning to slow the creation of new money and raising interest rates. That could shock markets, Fed critics say.

What should the individual investor do?

Have an investment plan tailored to one’s long-term needs and temperament. The investor should know when and how to invest for the long term—possibly 20 or even 30 years.

Others, with a short-term horizon, should think carefully about being in the market and how they might react to losses.

How Investors Can Survive Rocky Times

Stop trying to time market lows or highs. That’s because you can’t be sure of either. Have a coherent long term investing plan that you will stick to even in bad times.

That’s the advice of Chris Costello, a certified financial planner in Overland Park, Kansas. Costello, also the co-founder of blooom (3.o’s), a 401(k) robo adviser, doesn’t expect a crash, but his long-planning includes working though bad times.

“It seems counter intuitive, but when markets are on a downward trend, that’s the best time to buy,” Costello says.

He adds that the average investor should not be in any one kind of investment, but several categories (Stocks, bonds cash, etc.). He or she should rebalance from time to time based on how long one will stay in the market.

Money pros say the longer one can consistently invest in the market, the better one can recover from a crash, the more aggressive one can be. Actually, if you are young, say in your 20s or 30s, you should welcome a crash.

Huh?

Well, because you are buying on a regular basis and are ready to do so over 20 or 30 years or more, at the outset of your investment program you will get to buy securities that have been heavily discounted because of a crash. You will be duplicating the strategy of one of the world’s greatest investors.

Buffett’s Glory

For example, back in 1973-74, the stock market went down by some 40 percent of an 18-month period. Back then, Warren Buffett had been waiting for a bad market and had plenty of cash. He rushed in and scooped up millions of shares in great stocks that were suddenly selling at huge discounts. Later in the 1970s and in the 1980s, as markets recovered, Buffett’s bargains made him billions of dollars.

On the other hand, the shorter the period one is in the market, the more careful one should be because one has less time to recover from a crash or even a decade of bad stock returns.

Hunter Lewis, a money consultant with his own firm, partly agrees that investing for the long term makes sense. But he argues that getting in at the right moment, avoiding jumping into the market as a bubble bursts, is also important.

“If you get in at the right time and then you stick it out you do pretty well historically. But you can get in at the wrong moment, then it can take forever to get your money,” Lewis says.

Safe Investing

“You should always play it safe with money you need more immediately,” Costello adds. “And plan to move more of your money into lower risk investments like bonds the closer you get to needing it.”

Danielle DiMartino Booth, a former Federal Reserve adviser, agrees.

“My mother is 71 years old and she doesn’t have a penny in the stock market. It is because everything she has in savings she needs to live on.”

Booth says a successful long-term plan depends on when you will need to access your investments and your risk tolerance.

To avoid shooting yourself, she offers simple advice: “Know thyself.”

About The Author

Gregory Bresiger

Gregory Bresiger is an independent business journalist from Queens, New York. His Personal Finance articles have appeared in publications such as The New York Post & Financial Advisor Magazine. He is the author of the eBooks “Personal Finance For People Who Hate Personal Finance” and “MoneySense”.