Should a recession affect your investment strategy?
My advice is as follows:
1. The first thing that you need to do is to take a look at this rule: https://en.wikipedia.org/wiki/Betteridge..._headlines
This applies to investment / stocks / the market more than anything else. Once you take a look at that, always keep it in mind when looking at media. For instance, refer to the rule above when looking at articles such as:
http://www.cnbc.com/2015/06/01/cramers-v...alued.html
2. The second thing you need to do is to read this article:
In reading that article, pay special attention to the following quote:
Quote:Quote:
Change your sources: Most of the people I speak with who have missed this huge move have been consuming a diet of doom and gloom. If you think that it doesn’t affect you, you’re kidding yourself. Constantly reading about hyperinflation and the collapse of the dollar and the end of the United States as a world power and the student loan crisis and omigod Obamacare is going to crush America and the Chinese are taking over the world and . . . STOP! Right now.
It is recession porn, a focus on the negative that is a leftover effect of the crash and great recession.
Go through your bookmarks, and delete all of these sites: the goldbugs, the end-of-worlders, the doom-and-gloomers, the outraged Fed critics, the Obama haters. They all have agendas t[/align]hat typically have to do with selling you subscriptions or advertising. They are not at all concerned with your returns, your portfolio or your retirement.
Let me repeat the most important part of the above - the doom & gloom bloggers do not have your interests at heart!!! they are just trying to make a buck and push their agenda to get more readers.
3. Once you internalize the above, determine your goals.
Are you looking to i) invest for retirement, ii) to speculate?, iii) what is your investment timeline? (retirement time is a very important thing to consider - are you looking to retire at 35 or 65? The answer to that question should provide you with a good idea of what your stock allocation should be (more on that below). Note, however, pure statistics have shown time and time again, that even the top-tier mutual funds and professional stock pickers are generally not able to beat the S&P 500 index. If people who get paid millions cannot beat the stock market over the long-haul, what makes you think that you will?
I learned that I could never beat the stock market the hard way - I got an inheritance of $10k in my early twenties. I spent a good six months reading all I could above investments, and put my money into a couple of stocks that I felt warranted the investment - surprisingly, I made about 50% profit. After that, I did the same thing -stock stocks are worth about $2k today
4. Come up with an asset allocation plan.
An asset allocation plan is the most important part of your investment strategy, and studies show it is the most important variable in determining long-term investment returns. You want to be diversified so that you don't get wiped out.
A prudent allocation is as follows: Take your age, and put that % of your porfolio in bonds (if you are 30 with 100k in your portfolio, buy 30k in bonds, the rest in equities). The rest should be stocks split between the total US stock market, and a smaller allocation to the international stock market. All of this on top of a cash emergency fund of 3-12 months expenses depending on your job stability.
An excellent further primer / recommendation on asset allocation can be found here:
http://www.bogleheads.org/wiki/Three-fund_portfolio
I recommend going with a conservative asset allocation first (for a few years) to see how you react in down cycles - if you are firm in maintaining your allocation, you can go for less conservative with more equities.
5.Stay the course
The great thing about having your assets allocated to set percentages, is that when bonds and equities go through ups & downs, you will need to rebalance your portfolio in order to maintain your allocation. Thus, if there is a crash and the stock market drops, your investment of 10k in equities could now be worth 5k, and thus will now represent only 40% of your portfolio rather than the previous 70%. To rebalance, you will need to purchase more stocks. Inevitably, this leads you to purchase at low prices.
Maintaining the course is the most important rule - but also the most difficult to follow. Its hard to keep buying stocks to keep up with your asset allocation when your portfolio is dropping a mile a second. However, the rewards will be great. Remember, bear markets come and go, but they are inevitable. Stay the course.
6.Be tax efficient
This is very important and also not considered by many starting investors - you need to control your taxes. Place all your investments in tax efficient accounts (open up an IRA if you dont have a 401k yet - contribute the max 5.5k each year - you can withdraw principal @ any time.) If you don't utilize tax efficient accounts, if your investment grows from 5k to 100k, rest assured you will be coughing up a substantial amount of that growth to Uncle Sam when you want to cash it out.
7.Conclusion
I hope the above was helpful to you - unfortunately, Ive got to run, so I can't finish this post.
However, you can read way more about the principles that I have outlined above at bogleheads.org