If you have already “won” the game of financial life, stop playing and start planning
Is the investment population at-large getting greedy? No, because that implies that they are in the process of becoming greedy. Greed and the stock market in 2021 are past-tense.
In other words, it’s already greedy on a scale that we have not seen since 2000 and 1929. And, when you get into rarified speculative air like we see now, the comparisons are less important than the acknowledgement that risk is high.
If you are young and have yet to hit your peak earning years, you have an advantage over AARP-eligible types like me. You have probably accumulated just a small fraction of what will ultimately be your retirement investment portfolio, decades down the road.
Magic number countdown
However, if you are 70% or more toward whatever your “magic number” of assets is to retire, the current market environment should cause you to lean forward, and take account of where you’ve been. Because this is no time to give it back, in the name of playing along with the headlines, or joining in the FOMO (fear of missing out).
For you, the pre-retired or retired investor, the challenge is not to turn every $500,000 you have into $1,000,000 in a few years. Instead, the first goal is pretty simple: don’t blow it. While the generation behind us is jacked up about making a “$1,000 score” on a swing trade, your portfolio swings by that much during most hours the stock market is open.
A dollar buys the same amount of goods and services (a.k.a. “stuff”), no matter who owns that dollar. So, if you are fortunate enough to own a significant amount of dollars, you can afford not to swing for the fences at a time when the stock market is exuberant on a variety of valuation and sentiment gauges.
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This is a time in the market cycle where an investor can easily forget who they are. Their heart knows that they have made most of what they need to work and “do life” on their terms for the rest of their days.
But their brain is thinking like a 30-year old. They see how well their S&P 500 index fund has done, and they engage in perhaps the most dangerous investment misjudgment of all: they “extrapolate.” That is, they take their recent success in the market, and assume the future will be similar to the past.
Investing is not usually like that. OK, perhaps the old investment mantra, “it’s different this time” turns out to be accurate, and we get another few years of double-digit returns for the S&P 500 and the Nasdaq
. That will be great. But is it worth the risk if you do fall into that class of investors that have won the game?
Fortunately, there are ways to satisfy your pangs to keep the profit train going if the stock market continues to cooperate. This is where I think the best approach is to break your portfolio into the 3 pieces I have described here in the past.
Re-introducing the 3-piece portfolio
* A CORE segment that investments in the broad stock market, with whatever tilts you prefer (growth, dividend income, global, etc.).
* A HEDGE segment, which aims to take retirement disaster scenarios off the table
* A TACTICAL segment, designed to “go with the flow” in case the stock market stays more volatile than average, as it has been for over a year
The mistake I suspect many are making as I write this is that the CORE segment is too dominant in their overall mix. They are pressing the issue with the core, long-term stock portfolio because they realize that bonds are not what they used to be.
Is there really no alternative?
So, they practice the so-called TINA philosophy. That argues that at a time of low rates, “There Is No Alternative” to investing in stocks. Again, the past was pretty conclusive. It worked. But now, your retirement is on the line.
This is an ideal time to start thinking about alternative approaches. It doesn’t involve using bonds the old way. But it doesn’t mean you just sit in the stock market with the vast majority of your portfolio, then start planning when things first get rough. Because down markets happen faster than up markets.
A $10,000 portfolio that gets cut in half does not change an investor’s life. That’s because $10,000 is not a retirement nest egg. However, a $1,000,0000 portfolio that gets cut by even 10% can start to change someone’s views on their own retirement. That’s a $100,000 swing. Think about that.
You spent years getting to this point with your portfolio. Do everything you can to make all that hard work and discipline worth it.