After major stock market movements, sometimes I get asked to throw out my own commentary. Now, obviously I am not a market expert and CNBC doesn’t ever ring me up for interviews to argue with another talking head. There are also plenty of articles out there about why you should not panic and sell stocks. I can only offer what’s rattling around in my own head. A head that wears glasses from Costco and a haircut from Fantastic Sams.
Stocks provide ownership in companies, and by extension ownership of a piece of all future profits. Those profits can be either given back as dividends or reinvested in the company to try and make it even bigger (and ideally even bigger dividends eventually). Look at Microsoft, it’s finally paying a dividend after many years of share price growth. Apple, on the other hand, is still growing with no dividend. When things are uncertain, then you don’t know what those future profits are. This is why prices can vary so much. Any individual company most likely hasn’t gotten 10% worse since a week ago, but all those years and years of future profits might have been affected. People want more margin of safety now, and aren’t willing to pay as much as last week.
As someone still in the accumulation phase, I realize that I have no control over these day-to-day fluctuations. Some people look at stock charts like tea leaves and see patterns. I just tell myself that 20 years from now, the chances that the S&P 500 is still at 1200 is quite low. Actually, I focus on the overall ingenuity of the world these days, but I don’t have a handy reference number for them. So when stocks drop, I quietly keep on accumulating a larger and larger portion of these companies, which again is a larger and larger portion of all future profits. Focus on the fact that you are buying more shares, and not your actual balance down to the penny. To smooth out the ride, I keep 25% of my money in still-safe nominal and inflation-linked Treasury bonds. Ironically, after the credit downgrade, the value of US Treasuries actually went up. (See my target asset allocation & most recent portfolio update.)
If I was in the withdrawal phase of retirement, and trying to live off my portfolio, then hopefully I’d have only a much smaller portion of my portfolio in stocks. My risk tolerance would definitely be much lower. I would own more income-producing investments like dividend-paying stocks and bonds, and in this case focus on the income instead of the balance.
By Jonathan Ping | Investing | 8/9/11, 5:00am