Should You Get Out of the Market?

Bear

After the big moves in August, I am getting this question a lot.  Many are wondering should I stay invested or get out?  There is a lot of fear in the air when it comes to the stock market.  In fact, I don’t think that I have experienced a time when there was this much fear following as small of a decline.   Having said that, it is important to get control of your emotions.  Emotional decision making is a recipe for a bad decision.

So, let’s take a look at your options.

Get completely out of the Market

Of course, this is always an option.  The downside of getting out is getting back in.  For most investors, they are very hesitant in getting back into the market forcing them to just stay in a money market.  I tis important to have a re-entry game plan.  The mutual fund industry would argue that you can’t time the market and you might miss out.  I am less concerned with that reasoning and more concerned with the first downside mentioned above.

Adjust your risk level

This is a relatively easy way to look at investments.  First, determine how much you have invested in stocks and or stock funds.  Let’s say that you have 80% invested in stocks or stock funds.  Said another way, you are taking 80% of the risk of the stock market.  Maybe you are not comfortable with that high of a percentage.  If not, than lower it to a percentage that is more of a fit with your comfort level. The rest of course would be invested in high quality short-term bonds or guaranteed type investments.  Keep in mind that you have to be careful with bonds as well.  Considering them a safe investment is not wise.  They have their own set of risks.  With bonds, remember high quality and short-term.

Clean up your portfolio

Go through and take inventory of your investments.  For each investment, ask a simple question.  Why am I hanging onto this investments?  What is the compelling reason to stay invested?  What is the upside or the downside?  Sometimes we treat our investments like the clothes in our closets that never get worn.  We know we won’t wear them.  Yet, we don’t get rid of them.  If you did an honest assessment, you might find that you would completely go another direction.

Use Lower Beta Funds

Beta measures the risk of a mutual fund.  A beta of 1 means that mutual fund is taking 100% of the stock market.  A beta of.5 means that fund is taking ½ of the risk of the stock market.  A beta of 1.5% means that fund is taking 150% of the risk of the stock market.  You can lower your risk level simply by going with lower beta funds.  My research on lower beta funds shows that they recover quicker from loss.  (past performance is not guaranteed to repeat in the future)  You can research your funds at www.morningstar.com

Make room for Alternative Mutual Funds

A good alternative mutual funds is as its’ name suggests.  They offer an alternative way to invest.  A true alternative mutual fund will invest to be non-correlated to the stock market. Said another way, it is invested to perform opposite of the stock market.  Although this category of funds can offer a good solution, you have to be careful for a few reasons.  First, not every alternative fund truly works that way.  I have found many alternative funds that have no business being classified in that category.  Second, there are some alternative funds you can buy and hold.  However, most of them have to be managed.

Delegate the Management to an Active Money Manager

Get out of the buy and hold game and let someone actively manage the money for risk and growth. Having someone who has experience with alternative funds and risk management can be a real advantage.  If you want more information about this option, please email me at bob@prudentmoney.com

The above are just some ideas beyond taking the nuclear option of just getting completely out of the market.  You can mix and match any of the above ideas in a portfolio strategy.  It goes without saying none of the above is intended to be taken as advice!

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