Here’s a smattering of recent headlines. See if you can find rhyme or reason in them, at least in terms of actions you might take — right now, today — in regard to your retirement investing.
- After-hours buzz: TI, IBM, Best Buy & more
- Brace for ‘more choppiness,’ strategist says
- Sell crude on Obama’s Syria shift: Pro
You could rewrite all three of these headlines to say one simple thing: “Markets go up and down. Deal with it.”
And that’s the really important distinction between a short-term trader and long-term investor. I do not mean to belittle the thousands of people on Wall Street who spend their time “providing liquidity,” as the hedge-fund joke goes. That’s what they do.
That doesn’t mean, however, that you should join them in this pursuit, or even pretend that you can. Too often, “providing liquidity” is shorthand for “needlessly risking your money.”
What do I mean by that? Well, if you really thought you were in a position to know the answers to any of these concerns — the price of oil tomorrow, whether markets will be more or less “choppy” — things might be different.
But you aren’t. Neither am I. To pick one of the headlines above, what are you supposed to do about “after-hours buzz” anyway? Trading is done, markets are closed.
If you were to go into your account online after hours, yes, you might find you have the ability to trade. A lot depends on your profile at the brokerage but, increasingly, retirement investors are being handed tools once reserved for fancy trading desks.
Is that a good thing? Absolutely not. Yes, you can learn more about how investing works and the nature of off-hours trading. You could, if you wanted, employ all kinds of complex market timing, hedging and options strategies, even trade on margin.
And, in doing so, you are “providing liquidity.” You become the patsy, the uninitiated, untrained non-expert trying to make a go of it. I’m sure the market pros would love to have more of us in there after hours, battling to get an order executed as high-frequency machine trades fly and sophisticated managers dance around us in the dark.
Retirement investing zen
It’s senseless, and a very bad approach. What should retirement investors do? The ideas are “zen like” in their simplicity — although they come with plenty of research behind them.
1. Diversify
Don’t own stocks and bonds. Own markets instead using index funds and ETFs. The biggest pension funds and endowments long ago abandoned single company investment ideas for the bulk of their portfolios. They might do some tricky moves around the edges, but not with the real money that matters. Diversification cuts risk in any market — up or down, calm or volatile.
2. Stop trading
Imagine a world in which you can completely and totally forget about your holdings. You can turn off CNBC and take a cruise, worry-free. Your interest in the daily comings and goings of executives at the top and world events is driven by actual interest, not fear. If you own markets in a thoughtful retirement portfolio, you have much less need to trade compulsively. News headlines fade into the background, where they belong.
3. Rebalance
So should you completely disengage? No, of course not. Rather, you get to use a time-tested strategy of the world’s biggest and best investors: simply rebalancing your portfolio on occasion. You sell the clear gainers in each asset class and use the cash to buy investments temporarily out of favor. Not stocks, but entire markets, using a portfolio indexing approach.
