Years ago, my father asked me a question he thought no investor had ever asked before.
“When,” he said, “do I have enough to stop investing in stocks? Is it okay to say ‘I don’t want to keep risking my money in the market?’”
It was 1999, the Internet bubble market was still getting fully inflated and my dad – who died in 2012 – was in his mid-70s. He didn’t actually want to get out of the market, he just wanted to make sure he could sleep at night, especially if the market went sour.
These days, having survived a nerve-wracking market freefall from late February into March – only to see the market rebound completely but settle into what could be a long run of nausea-inducing volatility – many investors are wondering when and how to head for the exits.
When the motivation is emotional panic, leaving the market is always a bad idea. Simply put, there is never a good time to panic.
But my father wasn’t panicking. Neither is Bob in Seattle, a 75-year-old college professor who admits to a “low tolerance for risking my life savings,” nor Robin in Richmond, a 55-year-old engineer who saw his portfolio recapture a level he considers his “finish line” during the recent rebound.
They’re among many readers to write recently wondering if it is OK to sell their stocks if it means avoiding future worries of being beaten up in any precipitous downturn.
While the headlines are focused on the retail newbies who are chasing hot stocks and blowing up the trading apps, plenty of long-time investors would be happy to give up on market risk permanently.
“Why increase risk in equities simply to die [possibly] with more money,” writes Bob, who expects to teach for up to 10 more years, but whose assets are impressive enough that he could have retired years ago. “When is enough money enough?”
It’s a good problem to have, of course, but the answer is much less about market conditions than it is about risk, and an investor’s psyche.
For starters, dispense with any fallacy that getting out of the stock market means that you have “avoided risk.”
It simply means you have eliminated principal risk, the chance that a downturn chews up your money.
The consequence of that kind of move is that a portfolio is much more at the mercy of purchasing-power risk, otherwise known as “inflation risk” or “the risk of avoiding risk.” It’s the possibility that a portfolio is too conservative and that the investments can’t grow fast enough to keep pace with inflation.
Right now, with inflation nearly non-existent, that move may seem good, but economies historically respond to big injections of stimulus money with inflation, and many experts expect that it will hit the U.S. hard when the business world has fully returned to normal sometime around 2022.
With the Federal Reserve promising to keep interest rates lower for longer, there’s a real question of whether bond investments will deliver sufficient upside. That’s interest-rate risk.
Ultimately, this is why most financial advisers suggest that there is never a time when a long-term investor following an asset-allocation plan can be completely out of the market.
Consider investment industry legend Jack Bogle — founder of the Vanguard Group and, in turn, the index fund — who famously followed the investment rule-of-thumb to “Subtract your age from 100” to determine your allocation percentage to stocks.
That formula is typically too conservative for most investors (taking your age from somewhere around 130 or 140 seems to appeal to more observers).
Bogle suggested that investors count Social Security as an income-producing asset in their portfolio, which would mean that the allocation to stocks would be slightly higher than the result of the formula.
The point, however, is that even Bogle’s simplistic recommendation would mean that an investor nearing 100 years old keeps a sliver of money in stocks.
Financial advisers typically suggest that investors focus on what the money is invested for. There’s a difference between needing to tap investments to pay monthly bills than in using stocks to supplement income, or to build a legacy for future generations.
I wanted my father to focus on being set for life, so that he could live worry-free that’s what he wanted his years of saving and investing to achieve.
That’s where “Don’t Mess it Up” money comes in.
For my father – but also for Bob, Robin and many others – the idea should be to find the number that ensures their future, regardless of what the market does. That money should be kept safe, hopefully earning something better than you might get on emergency savings, but with safety trumping earnings on the priority list.
With that nest egg set aside and assured of not being messed up, how the rest of a nervous investor’s money is put to work doesn’t truly matter.
That shouldn’t be seen as a license to go buy scratch tickets, but rather is a way of riding out the troughs and downturns.
It means that Bob isn’t “risking his life savings” and Robin isn’t coming back across “the finish line.”
Using their metaphors, Bob is only risking his excess savings and Robin his cool-down money. By securing their lifetime savings needs, the risk they face in the market is only on money that, realistically, they should never need.
That wouldn’t make losing it feel much better, but it means that they won’t be devastated by the next market downturn.
Even investors who aren’t set for life can factor in various levels of don’t-mess-it-up money, but that typically means diversifying and taking on more and different types of risk rather than simply trying to avoid one form or another.
“The market doesn’t decide your intentions for your money,” says Patrick Healey, president of Caliber Financial Partners in Jersey City, N.J. “You decide. Maybe you are investing to make sure you don’t outlast your money, or trying to earn a good risk-adjusted return, or simply trying to avoid agitation that comes from being in the market. The way you invest changes over time, but it’s always going to be more about your emotions and your goals than about what’s happening in the market.”