Now that the Nasdaq Composite has fallen 60% and the S&P 500 has swooned 30%, we're beginning to see news of investors moving out of stocks and into, more than anything else, bonds.
The Wall Street Journal recently ran an article titled, "Some Diehard Investors are finally losing Hope." The irony is that the people written about in the article are not investors at all -- they're speculators. The article explains how one person bought large blue chip stocks last year, and he already sold them because they "went nowhere." He and other investors are moving money from investment to investment, waiting for something to rise.
Time-frame issues aside, this shows a complete lack of strategy. Moving into bonds after a steep decline in the stock market is a reactionary move, like flinching when something frightens you.
Last week, I was asked in an interview, "Should investors now consider putting half their money in bonds, and taking it out of stocks?"
I answered the interview question with another question: "Does Warren Buffett significantly change his investment strategy whenever the stock market declines? Is he moving half his money to bonds?" No, he's still following his same long-term strategy.
I then realized the problem: Many, maybe even most, of today's investors do not have an investing strategy.
Many people recently bought stock because it appeared that the stock market could only rise. After a year-long decline, stocks appear capable only of falling, so people are now selling and buying something else, such as bonds. After stocks eventually rise for several months again, however, they'll be aching to sell those bonds and buy back stocks. That isn't a strategy. It's idiocy.
Last week, David Gardner wrote that your portfolio should reflect who you are. Even before you build your portfolio, your strategy should reflect who you are and why you are investing.
If you don't have a strategy that you can summarize in one page, you need to develop one. To help you articulate your strategy, let's summarize mine as an example.
- My stock investing time frame: At least 10 years.
- My involvement: Much higher than average, due to my work. I probably spend 30 hours a week thinking about investing.
- My tolerance for risk: Given my time frame, my risk tolerance is high with 3/4 of my investments, and moderate to low with 1/4.
- My investment method: I mix three long-term Fool investing strategies for a complementary, "balanced" approach. I own four Rule Breakers and seven Rule Makers. Of the seven Rule Makers, most are in Drip accounts. I buy more of these stocks fairly regularly, commission-free, when I like the stock prices. I do not want to own more than 12 stocks.
- My goals: I seek capital appreciation for more options in life and toward retirement. My performance goal is to top the S&P 500's return.
- What will make me change my strategy?: I have a company-focused strategy, so if a company I own begins to fail to meet my expectations (which I have written down as well) and the problems don't appear temporary, I will consider selling.
- What else might make me change my strategy?: I monitor my performance, and if I begin to lag the S&P 500 for five years or more, I will consider moving into an S&P 500 index fund.
I believe that you should outline your strategy something like this at home. Articulate your strategy. This will help to keep you from moving money back and forth whenever the stock market rises and falls, because that sort of reactionary investing will only cost you money. You need to find the right strategy for you and stick to it.
Of course, you will tweak your strategy periodically, and at first, you may realize that you need to overhaul, or create, a strategy, but once you have the right, slowly evolving strategy in place, you won't be inclined to jump from stocks to bonds after the stock market falls. Can you imagine the great investors of the world being so fickle? Fellow investors, patiently find and articulate a strategy that works for you, and stick with it.
The Rule Breaker Portfolio will share its evolved, newly-tweaked investing strategy tomorrow. Fool on!
Jeff Fischer is learning how to climb walls and walk on bamboo as part of his life strategy. The Motley Fool is investors writing for investors.