I try my best to avoid giving investment advice to friends and family. It too often leads to emails and conversations like this, and no matter what they tell you, if the market falls after you tell them to invest in a broadly diversified index fund portfolio, they will blame you.
But the email above came from a dear friend, so I gave him a call. He is quite a bit older than me, in his early 50s, and his portfolio value just surpassed $100,000. With a nearly paid off house, this investor has begun an intensive commitment to saving for retirement. I was honest with him from the beginning that he was getting a late start, but assured him if he can make investing a priority for the next 15 years, he may end up in decent shape.
Knee jerk reactions to market swings like the one above eventually result in big mistakes. I reminded him that our goal is an annual return of between 5 and 9 percent, and some years he may lose as much as 40% of his portfolio. I asked if he could "stomach" this if it happened, and he assured me he could.
Market swings, talking heads on TV, and doom and gloom "experts" can cause us to deviate from our long term investing plans. I've found over time that the BEST way to guarantee successful investing is to master you own behavior.
I closed my phone call with my friend by citing a "gem" I once read by Warren Buffet. He said to invest as if you had to put your money into it with no chance of getting it back for at least 10 years, ideally even longer.
Are YOU controlling your investing behavior? Can you stomach the risk you're taking? A good rule of thumb is your portfolio (assuming you use index funds) can drop by half the % you have invested in stocks. So if you have 70% of your portfolio in stocks, you should be OK knowing it may one day lose 35% of its value. That's just part of the game.
Take a moment to revisit what you'd be able to "stomach." Does your allocation match your risk tolerance?
Better to determine this now when markets have climbed for the last 3 years then after a deep market crash.
Yours in simplicity,