Investors - how do you handle market fluctuations?

[midjd]

I haven't been investing long - started my retirement accounts last summer, then a brokerage account around Nov. We have about 3 mos expenses in cash, but the rest of our EF and savings are in index funds/ETFs, and I keep a pretty close watch on them. This is stressful on days when the market is performing especially badly. I wonder how others deal with it? Do you check the market daily? Does a gain or drop affect your mood? Are you a "buy and hold" or do you bail when the going gets bumpy?

Also interested to see how the answers depend on what assets are in the market. If it were just retirement, I probably wouldn't worry (I'm 27), but since our EF is in there, I'm hesitant to let it dip much - because luck always seems to have it that the market tanks right when we have a huge expense Still, I have the Phil voice in my head saying "Leave it alone, it'll straighten out!"

[formerexpat]

I keep a pretty close watch on it.

When I first started investing, I would keep an eye on the investments / stock market daily.

Then I stopped paying attention and only checked it bi-weekly [when I got paid, I would update the values in my spreadsheet].

Then I stopped paying attention bi-weekly and looked at it monthly...

Then I stopped paying attention monthly and started looking at it quarterly...

Now I only look at it quarterly to adjust my holdings to be at my diversification level.

The question is are you committed to 30 years in the market? Then who cares what happens the next 29? Stop looking and worrying yourself so you live to see those assets - stress kills.

[Tiny]

We have about 3 mos expenses in cash, but the rest of our EF and savings are in index funds/ETFs, and I keep a pretty close watch on them. This is stressful on days when the market is performing especially badly.

I have 3 months expenses in liquid savings (savings, CDs, a money market account) that I consider my EF. I use to have more but I realized I could handle more risk. I re-classified the money above and beyond the 3 months expenses from Emergency Fund to "After Tax Investments" or sometimes "Early Retirement Investments". I think would drive myself insane with worry watching the market every day if I still thought of that money as "short term Emergency Money".

Technically, it is still Emergency Money I'll use if something really bad happensand I've gone thru my 'cash' and can't come up with some other way to cope -- but I'm hoping/banking on something so horrible happening that I need to liquidate the investments. Something so horrible would be long term unemployment or serious medical bills. If my house needs a roof or I break the car - I'm not gonna liquidate investments. I have 'cash' for that.

Other than 'redifining' the money in my head I was alot like formerexpat - checking less and less as I got more comfortable with the idea that it was longterm money and not shortterm money.

[Mardi Gras Audrey]

A lot of booze....

[illinicheme]

Mostly I handle it by not looking all that often, and having the real world example of how much wealth my parents have built through diligent investing.

[phil5185]

how do you handle market fluctuations?

Volatility and fluctuations are what makes a market a market - buyers/sellers work by supply/demand and dictate prices accordingly. So the market takes a few steps up, a few back, sometimes for a week, for a month, for a year, for a decade. But historically it trends ever upward at about 10%/yr to 12%/yr.

The investors who try to avoid the lows and ride the highs seem to fail - one brokerage did a 23 yr study. While the index averaged 14%/yr for the 23 yr block, the investors who sold during a downturn (to avoid it) and bought back after the market recovered (sounds dumb when you say it, huh?) got an average return of about 3%/yr - ie, they literally got only a CD return during a 23 yr 14%/yr market.

The winners were those who bought incrementally and accumulated, never selling. You really only care about the price 30 yrs from now, it doesn't matter to you how it gets there. I'm guessing Dow150,000 by 2041, plus you get about a 2.5%/yr return from dividends (which effectively doubles it to a Dow300,000 equivalent).

[midjd]

Thanks for the responses (and LOL audreyalice)

I think some of it is the newness of being in the market. Plus my risk tolerance is not very high right now - DH is in school so I'm the sole wage-earner until at least next August, and we just bought a house. Still, I'm doing my best to leave well enough alone - Phil, after 3 years of reading you on YM and then here, your message has gotten through.

I think I will make an effort to only check once a week and then try to cut back further. Like ATSiaRU mentioned, pretty much anything but unemployment or HUGE medical expenses could be covered without liquidating investments. And though it's tight on just one income, the bills and a few extras are covered. I know I shouldn't worry so much

[Gardening Grandma]

1) Don't keep your EF in the market. Emergencies can occur during a bear market. Keep your EF where it won't lose value even if all you get is 1% return.
2) If this is your retirement and you are under 30, don't check it daily. Quarterly or semi annually is enough.

Fwiw, DH retired in Jan, 2008 and we spent that year watching our retirement nest egg shrink 17%. We did not do anything. We didn't make a withdrawal nor did we sell. It was not fun, but it came back.....

[Plain Old Petunia]

If you feel stressed over day to day market fluctuations, then perhaps 3 months in cash is not enough for you.

[Deleted]

I update my Quicken spreadsheet daily so yes I check fluctuations daily. Doesn't bother me daily.

I am working on getting my EF to 5K now and from then on everything extra is going into the market ;D

[jk70]

As someone who works professionally in the markets I can tell you the best way to handle fluctuations is to ignore most of it (unless you're a daytrader). The biggest mistake I have seen is the panic buying and panic selling.

Suddenly, the market is getting killed for some reason and everyone just piles on. These are actually my most boring days because I know we won't react so i open the newspaper and don't even watch (not exactly true..sometimes I'll be watching panic selling days to try and buy something)

And it's ironic how much I hear the retail investor sitting on the sidelines waiting for a pullback to happen but then a pullback happens due to some event (think Japan tsunami) they get spooked and think the world is ending and stay out of the market even more.

We actually use a 20% loss rule - if one of our holdings drops 20% we have a conference call about it and decide whether to keep holding. The 20% is also based on a relative value not absolute. If the whole market drops 30% and our stocks drop 20%, then no discussion.

[Deleted]

I rarely look at my retirement investments. Like the pp, this took years to get to. At first I would check on them often, but I honestly doubt I looked at them more than 2 or 3 times last year. Lately, with trying to figure out what to do with taxes and IRA's I've been in there a little more, but I didn't even remember our passwords and had to have them reset. LOL

[RoadToRiches]

Great thread.

I have a question for those of you who are in a market. I understand buy low (when market is down) sell high (when market is up). But how do you know what to buy when stuff is going down? For example, if certain stock is doing pretty good and then market goes down and that stock goes down considerably, do you buy more of that stock? How do you pick what to buy when everyone else is selling?

Or do you just buy same amount regardless of the price?

[phil5185]

I understand buy low (when market is down) sell high (when market is up). But how do you know what to buy when stuff is going down? For example, if certain stock is doing pretty good and then market goes down and that stock goes down considerably, do you buy more of that stock? How do you pick what to buy when everyone else is selling?

Well, you can try to 'time' the market if you want to, everyone seems to feel that they will be the one who can do it - I tried it 30, 40, 50 years ago so I've BTDT. But I became wealthy only after I quit that. No 'buy low, sell high' for me.

There are probably 1000's of books on how to time the market, beat the market, predict the market. Some are extremely complex and well thought out - the Elliot Waves with Fibonacci ratios, point & figure charting, candlesticks, moving averages, cup & handle formations, head & shoulder formations - and lots of trading vehicles - put options, call options, hedging, straddles, futures contracts (I had fun with corn futures). The wealthy ones are probably those who write/sell the books.
But if the future actually could be predicted, only one book would be needed, not 1000's.

[runewell]

Apr 14, 2011 23:07:49 GMT -5 Gardening Grandma said:

1) Don't keep your EF in the market. Emergencies can occur during a bear market.

The idea of three months' salary sitting at 1% is something I wouldn't do personally (unless we were in the middle of a stock martket metldown).

Better yet, why not save up 4 months of salary instead of three and leave it in the stock market. So if the market tanks, you should still have three months and if does well eventually you will have 4.5 months, then 5 months....

I guess I'm advocating an emergency fund for your emergency fund (a.k.a. risk load) so you can keep it invested.

[jk70]

to be honest we don't always know (if we did Warren Buffett would work for me) but a lot would go into it: technical, why is a specific stock dropping, who's selling, is it industry wide, etc. etc.

we study our holdings pretty well (we don't buy anything until we meet with management) so we really get to know a stock, including how it trades. A lot of times we have already determined that if stock "A" drops to this level we'll add some more to the position so when it hits it's easy to buy it (although we still dig into why it may have dropped).

We generally ignore macro events, although that doesn't mean we just run out and buy while the whole market is getting hammered. But, to some extent, Phil is right - I literally only study 2 charts; one is your basic bar chart with moving averages and one is point and figure. we keep our technical look very simple. there are so many chart studies it would make your head spin. Keep it simple is the way to go.

[Wisconsin Beth]

Not to derail the thread but surely you must have some kind of exit plan for your holdings? How do you decide which ones to liquidate/sell? How do you decide, over the course of time, what to hang on to and what to let go of?

[Sum Dum Gai]

When I first started putting money in equities I would check daily. It was fun. This was also in the second and third quarter of 07, so it was climbing all the time. By December it started to drop. I was still checking daily, and that was still fun to watch in a perverse kind of way. The only money in the market is our retirement money though, and I was 25 at the time, so I knew we had decades for it to recover.

One of my favorite games was getting my total return percentage and plugging that into a retirement calculator as my long term expected gain. Since your account isn't that old a good or bad week really skews your numbers, so my retirement date would bounce around by a decade or more. I don't know why it amused me, but it did. By like March 08 my return was so bad that if that kept up, and I continued putting 15% of my gross away for retirement, I could retire at 70 and I'd be out of money by 72. Sweet!

[jk70]

Not to derail the thread but surely you must have some kind of exit plan for your holdings? How do you decide which ones to liquidate/sell? How do you decide, over the course of time, what to hang on to and what to let go of?

we will hold a stock forever if it suits us (what is forever? who knows). one of our holdings (HIBB) we have held since 1999. In the 12 years we may have trimmed some, bought some back on a secondary, sold some to raise cash for a client, bought some back in the crash and so on.

we invest for our clients; we don't trade. Doesn't mean that if a holding goes through the roof on a takeover rumor that we wouldn't sell - we probably would. but we are also small cap growth managers so we buy very young companies that could, in theory, become Apple (although once a holding has a market cap > $3B we are required to sell)

[tskeeter]

Ignore the fluctuations. It's only money. You're young, you can always make more.

More seriously, I'd probably consider the non-cash portion of your EF as part of your retirement portfolio.

While the size of your EF should depend on your circumstances, I think some people get a little carried away. Although our EF/savings account is several thousand dollars, it is less than 1 month of our gross pay and it is more than adequate for us. First, we have two incomes. It is unlikely that we would both lose our jobs at the same time. Second, if one of us lost our job, we'd cut back spending immediately and reduce our monthly expenses by about 40%. Third, we have fairly limited essential expenses. Mortgage is <$1K a month, utilities, groceries, and insurance. No car payments, no credit card debt, no HELOC, no boats, trailers, RVs, etc. Could probably cover the bills with one pay check. Fourth, we'd be picking up whatever work we could get. Flipping burgers, mowing lawns, washing cars. Income is income. I've done it all before, so I know I don't have to wait for a job appropriate for my skill level. Flipping burgers is in my skill set and it's a pay check. Finally, if things really got tight, I'd start selling the shop full of top of the line woodworking equipment. If I'm looking for work, I don't have time to play with it anyway. And, a situation like this could be considered an update/upgrade opportunity at some point in the future. ;D

[oreo]

I'm too chicken to put any of my cash in the market. I know I have to but I haven't been able to bring myself to do it yet. I do have some retirement in index funds and stocks and I actually watch them every day but I don't worry about it going up and down. I've been doing it a couple of years now and have done ok. I used to just let it ride and not pay attention (when I had a 401K because I didn't have many investment options anyway) and was occasionally SHOCKED by my quarterly statement so I can't be that casual about it now!

[Deleted]

I'm 58, which means I'm closer to retirement and we're sitting on a bigger pile. (DH, age 72, is already retired.) It's been a crazy ride.

When the market is up, I update the assets practically every day! I LOVE watching investments go up. When I start hearing rumblings that the market is overvalued, I still put money in the brokerage account every month but am less likely to turn around and invest it right away. So, when things went bad, we had a reasonable amount in cash-equivalents, but still enough in other stuff that what we lost on paper was about 2.5 X my annual salary. That hurt.

When things were rotten, I updated only every month. I focused on the graph I had showing where we were vs. Plan and could see that, although the current year was awful, 2003-2006 had been pretty darn good. I kept putting money into the account every pay- what I COULD control was keeping on track with the planned savings. I reminded myself that we had not exactly lived a miserly existence while putting away all the $$ that disappeared- we'd had fun with some of the money and given some to good causes. DH would joke that the gold jewelry I'd bought in India over the years was performing better than our mutual funds. DH's calm really helped. It also helped that we never considered the investments to be money that we had to spend. Because I had steady employment and income, we never really changed our spending. We didn't have to cut back because we didn't go nuts when the investments were performing well.

In both good and bad markets I occasionally weed out the portfolio, with the help of my advisor- the funds whose wild ride has stagnated, the ones that took a deeper dive than everything else in the bad times and haven't recovered, etc.

Things look much better now. Annualized return on the portfolio is back up around 6% from 1/1/03 to date and my long-term projections are based on that.

[Deleted]

Do not put money into the market that you are not willing to lose....

With that caveat.....

I rarely sell....most of my investments are in Mega Cap dividend stocks (GE, JNJ, CAT, T, XOM, PG) are a few of the ones i own

I really dont care if the market is at 6000 or 16000. I watch the news...and if something catastrophic hits one of my companies...i will ascertain if it is a BP moment. If so...sell, and forget about the company for a while. If not....hang on.

Companies go in and out of favor with investors all the time. It is as Warran says, a popularity contest. So trying to time the market is crazy. I buy more as dividends are paid.....and as the companies grow...the stock price eventually rises.

Companies like PG do well in good times and bad times. Toilet paper is one of those staples in life that just HAS to be bought.

I am hoping to pass on my shares to my children....and retain the majority of the small amount of wealth we have amassed in the family. We all hope to give our children better lifes than we had.....and that is my same goal.

The market is, has been, and always will be a gamble. But in the long run....if you are patient....and are willing to ride out the swings.....it is the best way to amass wealth in my opinion.

[azphx1972]

I hope the market drops when my 401k and ROTH IRA buys are made, and I want it to go up on the days when I'm not buying. ;D

[ameiko]

I drink. The good stuff when the markets are rising and rotgut when it's falling.

;D

[2kids10horses]

wxyz,

It is incorrect to say that "market timing does not work." There are some very successful market timers. But, it requires a mind set and discipline and commitment most investors are either unwilling or incapable of making.

So, I agree with you, most investors should stay away from market timing, leave that for the pros.

That said, a buy and hold strategy is not foolproof. If you had bought the NASDAQ index in January 2000, and held on until now, 11 years later, you would still be down 50%.

While I somewhat agree with Phil's approach of buying the SP500 index and holding on, I wouldn't do that with all my money. I would split it 1/3 SP500, 1/3 International, and 1/3 Russell 2000. If I were trying to grow my nestegg, I would dollar cost average in, invest some each month. That way, when the market goes down, you buy more shares, and you will benefit more when the market goes back up. I like the Russell 2000 sector because the smaller companies are generally where the new ideas for products are, and they will grow faster than the older mature companies.

Personally, I trade stocks a bit. I don't mind volatility. If stocks go up, I make money. If they go down, I make money. It's when they go sideways, that's when I don't do well. It's not a strategy for the average investor. I stay on top of the market, every day. I'm either long or short. (In my trading account.) 40% of my trades lose money. Fortunately, I have more winners than losers. And the percentage gain of my winners is larger than the percentage gain of my losers. And I do have losers! They're the price for having winners!

[midjd]

Thanks again for the responses... the logical part of my brain knows that buy-and-hold is the best strategy, but the emotional part sometimes takes over! It's nice to have some reinforcement that I'm doing the right thing (even though it's so tempting to bail on a bad day/week).

2kids10horses, right now I'm divided about 1/3 S&P, 1/3 international, 1/4 Russell 2000 or other small/midcap indexes, and 1/10 a smattering of large cap, target 2045, and a couple others I'm forgetting. I know I don't have the knowledge, skill, or risk tolerance to try actively trading - at least not yet. It is something that interests me though, in a few years when we're back to 2 incomes and net worth is out of the negative range, I'd like to try it. Hopefully you guys will still be around to guide me

[phil5185]

about 1/3 S&P, 1/3 international, 1/4 Russell 2000 or other small/midcap indexes, and 1/10 a smattering of large cap, target 2045,

LOL - you made me look at the Target2045 Fund. Wouldn't 100% in the 2045 Fund give you about the same allocation that you now have? It appears to be very close.

And then you would have real-time re-allocation over the years - and no market lag as you identify losers, validate them for a few months, then sell & replace.

[cronewitch]

I look at least once a day more like 4 times a day. I don't do anything about it just watch. It helps me have a high risk tolarence. A couple of years ago I lost about 170K and didn't do anything about it, now I have ridden it back to higher than ever.

It is funny watching it go up and down for no apparent reason. I might wake up to it is up 15 points then mid day have it up 30 then it will close down 5. I could never day trade I don't know what the future will hold. My portfolio might be up or down 15K in a single day I am up about 25K YTD but could end the year down.

I have been investing about 25 years and have made a lot of money more than I have lost and expect retirement to be the same.

[Deleted]

I only have my retirement invested in the market, so I can get by with the Ronco (set it and forget it) school of investing.

Is the risk level off for your EF? You are young enough that you can be pretty aggressive with your retirement, but that's not the goal for this money. You should be trying to beat the 1% or whatever you would get from a traditional savings account, but nothing too wild and crazy.

Alternately, is your EF parked somewhere that you see the fluctuations in your more aggressive retirement portfolio every day? Even if your EF isn't subject to the same wild swings, it may stress you out just to look at that reality every day. I'd try to find a way to separate my online records into what I want to see every day and what I want to check on every quarter or so.

Take deep breaths and good luck!