Financial advisors have long recommended that investors tone down their portfolio risk as they age to prevent the chance that falling equity prices will stifle retirement plans. However, as many have experienced over the past year and a half, stock prices have fallen off a cliff and now threaten the retirement of millions of people.
Throw out what you know
It now may be time to forget everything you have ever thought about market risk. You may need to assume more, rather than less, risk to catch up and generate returns. After the beating the markets have taken to fall more than 50%, stocks look cheaper now than they ever have before, especially in the long term.
Safe havens won't make money
After plunging this far, the safe haven purchases of corporate debt and treasury bonds won't do much for your portfolio. After a 50% decline, you would need to wait out a full 20 year treasury bill just to get past par; that’s far too long to wait just to catch up to where you were just one year ago!
Safe haven investments were never intended to generate returns, but instead to protect investor capital amid falling stock prices. However, after a 50% plunge from top to bottom, it would be unwise to lock in the paper losses and switch strategies to protect your assets (this should have been implemented a year ago); instead it’s time to ramp up the portfolio and go long equities for the long term.
Sell safe, buy risk
Conventional wisdom would never suggest that investors go for more risk as they reach their retirement goals, but unconventional markets demand unconventional strategies. Investors should begin to sell off their holdings of debt and other safe assets like money markets and opt for equities – but not just any equity. Leading the recovery will not be those companies that led the decline; you won't see financials leading Wall Street when the recovery does finally come.
Go for the biggest and the best
Investors should look for the best companies in any particular industry to spotlight them in their portfolios. When searching through names to buy, don't think small and certainly not beaten; you want quality names that have blue chip staying power, ones that have been unfairly smashed in the market's decline. Stocks like Intel, Kellogg, Altria are strong, and they are sure to live through this recession and many others to come back stronger than they were before. All three of these brands have staying power, and with the exception of Kellogg, all three were sold off at an incredible pace as the market declined.
Buy the market if you can
One way to make a long term investment in a market bottom while smoothing out volatility is to buy into an index fund. In this case, a long term investor should consider an index like the Dow Jones Industrial Average to buy 30 big blue chip names. Luckily for investors, most of the “fall” in the Dow has already been wiped out Bank of America, Citigroup and General Electric, who have all plunged to new lows. Those three have been the laggards of the index, (General Motors too) and they have reflected poorly on the remaining quality companies that make up the index. From here, those four names have little to shed while the remaining 26 have plenty of ground to make up. If the four Dow laggards catch up, that would be great. However, if they don't, the difference to investors would be negligible.