talking about the angst you may have felt just after the
Fourth of July, as the news was full of problems in
Greece and China and the stock market was plunging. If
you were like many people, you worried about a stock
market meltdown ó one you couldnít bear if it ended
up like the one that ravaged 401(k)s, IRAs and college
savings amid the recession and financial crisis of 2008.
emotions still raw from 2008, people wondered last week
if they should sell everything. My email was busy with
people asking if they should duck for safety. Financial
advisers were getting calls too. In notes to clients,
they promised that Greece wouldnít hurt investors
because it was a small country, and China was going to
keep growing fast despite the plunging stock market.
notes were a little too simplistic. They underestimated
the mess Greece could transmit to Europe and banks if
financial problems snowballed to other countries.
Furthermore, the assurances on China seemed to flow way
too easily from financial advisers a long, long distance
from Chinaís economy.
government is secretive about the state of the economy,
and even analysts who have spent a lot of time there
come away without clarity about the worldís
storm has passed for Greece. It received a bailout, but
longer term the issues are expected to surface again. So
do you relax now, or dump all your stocks because
problems could arise again?
think about whether you were ready to run for the hills
last week. If you were, you might be taking too many
chances with your money. But thatís not because of the
outcome of Greece or China. Itís because you were
sailing along feeling fine until early July, and then
all of a sudden news on Greece and China crept up on you
and made you feel queasy.
incidents demonstrate that nasty surprises can surface
suddenly for the stock market. They typically are
surprises that financial advisers miss in the early
stages and arenít equipped to predict. Just think of
Greece as an example. To understand the outcome, you
have to know whatís in Angela Merkelís head. Sheís
the German leader whoís been calling the shots about a
Greek bailout, and Wall Streetís fancy financial
models donít allow them to peer into Merkelís brain.
hereís what you can do. Consider what would happen to
your money if one of the stock marketís inevitable
surprises comes along and whacks your 401(k) or
retirement money. Could you survive it? And if you
could, perhaps you can be calmer even with scary news.
If you are too exposed and canít survive a mess, make
example, if you have a giant chunk of your money in a
China stock fund, consider cutting it back. Financial
planners often suggest making specialized investments
ó like betting on China ó with only about 5 percent
of your money.
often individuals go with all or nothing ó either
all-in the stock market or bail out completely. Thereís
a better way: Hedge your bets. Hold some stock funds and
bonds at all times, and sprinkle spice ó if you are so
inclined ó with bets like China.
mixtures of stocks and bonds will save you even if you
arenít clever enough to spot the next crisis or find
an adviser who can peer into Merkelís brain.
the cautious approach a person might have taken with
stocks and bonds before the 2008 financial crisis. If
the person was feeling cozy before the crisis hit but
divided a $10,000 investment half in stock funds and
half in 10-year U.S. Treasury bonds, the money would
have been battered in the market crash, but not
destroyed. By the worst point in the downturn, only
$8,379 of the original $10,000 would have been left, and
the person might have been panicked. But then came the
healing. In 14 months, the person was back to even with
slightly over $10,000 again, and now has about $16,730,
according to Morningstar.
the conservative approach with the person who plops
everything into stocks and hopes he can figure out when
to bail or stick it out. A $10,000 investment totally in
the stock market in the financial crisis would have
melted to $4,980 at the worst point ó a lot worse than
the $8,379 from the more conservative stock and bond
the stock market healed, but it took a long time and a
lot of nerve. By March 2012, the risky investor was back
to even. Now, that person has $16,000. That has to be
reassuring. But the easiest way to proceed if you might
be upset by a sharp downturn is to ratchet back your
risks before the scary moments arrive.