Chuck Jaffe: Five vaccines for the next market flu
BY CHARLES JAFFE Market Watch
Wednesday, January 23, 2013
1/23/13 at 3:34 AM
I was waiting for a flu shot at a local pharmacy recently when a money-manager friend of mine walked out of the vaccination area, rolling down his sleeve.
"Now," he said, "if I could just get a shot that would protect me from whatever the market is about to do."
Alas, there's no way to truly inoculate yourself against the next market malady. In fact, the similarities between the mystery strain of market flu still on the horizon and the variety of influenza sweeping the country are interesting, as are the psychological reactions of people who are worried about getting sick.
With news outlets reporting the rampant spread of the flu this season, in our household there has been a level of fear about getting sick that we don't normally experience. It made us want to act, to "do something."
And that is precisely the same kind of emotion afflicting many investors.
Worse yet, I had not been back from the pharmacy an hour before I saw two news reports talking about how and why the flu-epidemic story is a trumped-up media creation. I don't regret getting the shot, but those reports left me feeling like I had shelled out money for protection that ultimately was not necessary. There's a cost associated with worry and protection.
That, too, is common with investors.
Consider how the statistics showed money flooding into bond funds last year and fleeing equities. Ask average investors about their thought process - as they rushed into an asset with virtually no yield - and they'll say their goal was to avoid the potential for stock-market losses at a time when the market was volatile, when there was the looming fiscal cliff and more.
For investors who stayed on the sidelines during 2012, they "protected" themselves out of a 16 percent gain in Standard & Poor's 500 index.
"I think the main thing people need to protect themselves against is knee-jerk reactions based on the fear generated from sensational headlines," says Diahann Lassus, a financial adviser with Lassus Wherley in New Providence, N.J.
Indeed, the problem is strong desire to "do something."
Norman Boone, president of Mosaic Financial Partners in San Francisco, says protection against the next Asian contagion or market malaise should be built into most people's long-term planning, making it possible to ignore the headlines. Lacking that, he worries that people will fall victim to the ridiculous. That, effectively, is protecting yourself to death, where your cure for the common volatility is worse than the sickness itself.
So how do nervous investors protect themselves against short-lived financial flu?
Experts suggest several steps besides diversification:
Original Print Headline: Five vaccines for the next market flu
- Keep a cash cushion. For many people, there's a peace of mind that comes with knowing your money is "there" - or at least that enough of it is there to tide you over through any problems.
- Hedge your bets. Whether it's options, collars or variable annuities, consider tools that could protect your gains if the market's ills cause you to retch.
- Control risk and manage volatility. Bonds and cash may not be earning much these days, but they do help manage the risk level of a portfolio.
- Focus on your long-term financial health, rather than the market's short-term ills. Stick to the plan and the investment policies that have gotten you this far.
- Fight the next market malady, not the last one. Investing to avoid the market's most recent problems is how a lot of investors end up with negative returns in solid markets. It's also how many people wound up avoiding stocks last year and missing out on double-digit gains. They "avoided" problems that did not reoccur, but their portfolio isn't healthier for the choices they made.
Chuck Jaffe, senior columnist for MarketWatch, can be reached at email@example.com or at Box 70, Cohasset, MA 02025-0070.