So how does an average investor, without Warren Buffet’s savvy, not lose during this time? There are 3 things you can do:
- Don’t Time
- Don’t Be Greedy or Fearful, Just Be
Let’s face it, most of these recessions are short relative to a long term time horizon. By long term I mean, most people will be retired for 30 or more years. According to Jacqueline Doherty, in her Barron’s article Closer to the Bottom, she says that “the average U.S. recession lasts 10 months, and stocks hit their low about 3 months before the recession ends.” Even though this recession has lasted longer, with proper planning you will have enough money set aside for income, or short term needs. A few important planning tips are:
- Have income for about 5 years available in short term bonds and money market positions.
- An emergency fund of 3 to 6 months worth of income or expenses in cash does wonders for the psyche in a market like this.
- Do not stretch your expenses by using credit to make extra purchases such as cards, vacations, etc.
If your short term planning needs are taken care of, it shouldn’t be difficult to adhere to the buy and hold philosophy. Even if you see your values drop, if you have 5 years worth of income, it would be hard to believe that in 2013 the market wouldn’t be back. Of course there are no guarantees, but we are far from a depression, and further from a “Great” depression. By definition, a depression is a economic activity shrinking by 10%. During the “Great” depression, the economy shrunk by 30%. Most economists agree that we just now hit a negative GDP in July, and according to Ms. Doherty, if it is average, we could see signs of a recovery to the economy by June, and a market recovery starting 3 months prior. The challenge is that some believe that the economy actually started into a recession back in the beginning of the year, Buffet included. If that is so, we may see a recovery sooner. Either way, if you get out now, you would be getting out after enduring most of the downturn.
Don’t Be Greedy or Fearful, Just Be
It may sound a little zen-like, but let’s face it, most of us can’t time the market like Buffet. The best way for us to participate in the stock market is by keeping our ego checked at the door and attempting to just get in the market, and be happy with the returns it has to offer. Most people get into funds they expect to beat the market, and during times like these, get killed. Then they go conservative and never recover. By just buying index funds, you don’t have to worry about beating the market all the time. And if John Bogle’s success with the Vanguard 500 Index fund is any measure of success, we’ll be in the upper percentile of return because of low costs and broad diversification. Not to mention, you don’t have to watch, or worry about it. You can, well… just be. Of course, past performance is not indicative of future performance. There are no guarantees when investing in the stock market.