Disgusted by stocks? Consider reducing your portfolio's risk
— -- Q: Is it "game over" for the stock market? After 10 years in the market, I am still in the red and stocks continue to fall and would have been better off with a savings account. Should I give up on the stock market?
A: Ready to throw in the towel and sell all your stocks? Be careful, there's probably another investor waiting to buy them from you.
When stocks enter an ugly period, and the current market certainly qualifies, investors get understandably irritated with the whole process. After all, you didn't risk your hard-earned money for fun. You're investing in companies so you have a chance at earning a positive return. And you need to earn a return if you want to have a shot at retiring and keeping up with the ravages of inflation.
But I'm not saying to ignore your feelings of disgust toward the stock market. The fact you're ready to give up on stocks is very telling. It tells me the portfolio you've selected is most likely too risky for you. If you're not able to withstand the ups and downs of your portfolio, you might want to reposition it. Most likely, a larger portion of your portfolio should be in less risky investments, like government bonds, which are actually rallying in the face of the stock market sell off.
You bring up an excellent point about stocks being very disappointing over the past 10 years. Reasonable investors might have expected to have received a better return over such a long period of time. But it's another reminder of the fact that stocks don't work on a clock or calendar. Returns can be volatile in the short-term. And if you evaluate your long-term track record during a short-term correction, then yes, the results will appear abysmal.
But keep in mind that when you're feeling disgusted by stocks, you're probably not alone. In fact, judging by the e-mails I'm getting from other readers, you aren't alone.
However, bailing out on stocks when they're unpopular is a strategy that's pretty much guaranteed to generate poor results. The last time I received so many similar e-mails of investors wanting to bail out was in late 2008 and 2009, just before a monster rally on Wall Street.
Your first step, though, should be to take a look at your portfolio. If it's swinging too much, you might want to add some less volatile stocks to the mix. Secondly, it's a good idea to have a chunk of money out of the market at all times. Just knowing you have this "emergency fund" that's deposited in a savings account will make you less jumpy about the money you do have in the stock market.
Matt Krantz is a financial markets reporter at USA TODAY and author of Investing Online for Dummies and Fundamental Analysis for Dummies. He answers a different reader question every weekday in his Ask Matt column at money.usatoday.com. To submit a question, e-mail Matt at mkrantz@usatoday.com. Follow Matt on Twitter at: twitter.com/mattkrantz
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