Traders like to say that bull markets “climb a wall of worry.” What they mean is that bad news is a constant and, often, unrelated to a rising market.
Sure, there are wars going on, and that’s terrible. Major parts of the global economy are suffering. Finances here and abroad are in terrible shape.
And all of that is not enough to stop stocks from rising. Rather, it can give a bull market reason to look past the headlines and attempt to push stocks higher still.
That tendency worries retirement investors. The worst-case outcome for long-term investors is to be “caught out” by a major market decline right before retirement. It happened to a lot of people in 2008, and they were justifiably angry.
What some people try to do in response is to market time. They take subscriptions to macroeconomic newsletters and spend hours each day watching financial television shows, trying to pick moments to sell or buy.
It’s great entertainment, I’ll grant you that. But it’s not actionable investment advice. Do you believe for a minute that a manager in charge of $5 billion of other people’s money is going to go on the air and share his exact plan for the next six months?
Let’s imagine he or she does that. Do you believe for a minute that you, a small investor sitting at a PC at home, can trade your account quickly enough to take advantage of this information? Hedge funds use laser beams to shave microseconds off their orders. You are sitting on a 50-Mbps DSL connection thousands of miles from Wall Street.
It’s likely that your upload speed is only a fraction of that. Fifty megabits is pretty nice for streaming Netflix, but you’re no hedge fund trader, not by a long shot.
The solution, interestingly enough, is to give up on trying to trade ahead of the pack. Rather, find a way to ride along with the pack as cheaply and efficiently as possible.
Indexing does that, and it’s a fabulously effective way to enjoy most of the gain from a running bull while not getting gored in the process. By diversifying broadly and keeping trading to a minimum, you get the ride without the bucking a bull can bring.
How can you avoid the last-minute decline scenario? Simply enough, you should not be heavily invested in stocks if retirement is just a few years away. You likely need stocks, at least some, well into retirement. But sitting on a mostly stock portfolio at 65 is just asking for trouble.
A broadly diversified portfolio, rebalanced steadily over time, will grant you a lot of upside over the years. Compounding helps maximize those gains. Stepping down risk as you get older banks the gains while avoiding the headaches of trying to stay ahead of an increasingly speedy market.
Retirement is no time to sit around watching cable TV and fretting about whether your investments are safe. If you find yourself worried about the bull market, it might be time to review your investments from top to bottom and make better choices all around.