Get Me Out!

by Jeff C. Johnson

Newspapers on rackA client called me a couple days ago and wanted to either reduce his equity holdings right now or buy a “put” option on the market to hedge his downside. Even though we had reviewed this client’s asset mix a few weeks ago, recent news stories spooked him as the market declined one morning.

This is not uncommon during periods of market volatility accompanied by dramatic media accounts of economic, financial, and political risks. People get nervous and emotional.

Selling based on emotion is just that … emotional! Logic and previous careful consideration of the downside and appropriate levels of risk are thrown out the window on the morning drive to the office.

But the real problem is this: You have to be right twice—once when you sell your position (it has to keep going down) and again later when you buy back your position after it has fallen further and the news hasn’t improved.

Long-term investors could benefit from a strategy that starts with the right asset allocation that can be held for the long term … 10 or 20 years or longer. And then rebalanced when market fluctuations shift the allocation.

There is no substitute for a long-term holding plan that is supported by knowledge of the history of stock market performance.

My book The Extreme Retirement Planning Workbook has a valuable homework assignment on this very topic.

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