The Investor and Market Fluctuations

Posted On January 18, 2016 By Admin In Behavioral Finance, Portfolio Management /

In 1934, Benjamin Graham first published his treatise “The Intelligent Investor”. Graham is considered by many to be the father of Value Investing and was a teacher of Warren Buffett. He wrote about the difference between investing and speculating, and devoted a whole chapter to “The Investor and Market Fluctuations.” I can do no better than to share this excerpt and to note that his advice is as true today as it was 80 years ago.

“The most realistic distinction between the investor and the speculator is found in their attitude toward stock-market movements. The speculator’s primary interest lies in anticipating and profiting from market fluctuations. The investor’s primary interest lies in acquiring and holding suitable securities at suitable prices. Market movements are important to him in a practical sense, because they alternately create low price levels at which he would be wise to buy and high prices at which he certainly should refrain from buying and probably would be wise to sell.

It is far from certain that the typical investor should regularly hold off buying until low market levels appear, because this may involve a long wait, very likely the loss of income, and the possible missing of investment opportunities. On the whole it may be better for the investor to do his stock buying whenever he has money to put in stocks…

Aside from forecasting the movements of the general market, much effort and ability are directed on Wall Street toward selecting stocks or industrial groups that in matter of price will “do better” than the rest over a fairly short period in the future. Logical as this endeavor may seem, we do not believe it is suited to the needs or temperament of the true investor… As in all other activities that emphasize price movements first and underlying values second, the work of many intelligent minds constantly engaged in this field tends to be self-neutralizing and self-defeating over the years.

The investor with a portfolio of sound stocks should expect their prices to fluctuate and should neither be concerned by sizable declines nor become excited by sizable advances.”*

As much as markets have changed over the past century, what has not changed is human nature. That’s why Graham’s advice to never sell a stock just because it has gone down remains so relevant today. Be an investor and not a speculator; don’t think that you can predict what stock prices are going to do next. If you’re in it for the long-term, use market volatility as an opportunity to put money to work.

*The Intelligent Investor, Benjamin Graham, `Revised Edition, 2006, pp. 205-206.

The Psychology of Volatility

Posted On January 11, 2016 By Admin In Behavioral Finance /

We’ve had a rough start to 2016, with stocks dropping across the board. Today, we are within a couple of percentage points of retesting the lows of last August. You can’t pick up a newspaper or tune into a business show on TV without being bombarded with the “reasons” why the market is down.

The key to success for investors, I would argue, is not in understanding the economy, interest rates, or corporate earnings. Rather, it is knowing what to do in volatile times.

There are two types of losses: a temporary drop and a permanent loss. Enron was a permanent loss. Single securities (stocks or bonds) can go to zero, and this does happen from time to time, especially in high risk situations. However, if you are investing in a diversified fund, such as the Russell 1000 Index ETF, the impact of a single stock going bankrupt is very, very small.

Volatility is the reality that security prices do not move up in a straight line, but fluctuate up and down over the short to medium term. The challenge is that it is difficult for our brain to distinguish between a temporary drop (market volatility) and a permanent loss.

The anxiety from a loss can cause not just emotional stress, but actually trigger a physical response in our body chemistry. The evolutionary response to danger is to flee, which for investors, means the strong urge to get out of the market, protect our capital, and stop the pain we are experiencing.

Unfortunately, selling during a period of market volatility has the tragic consequence of turning a temporary drop into a permanent loss. Most investors under perform the overall market precisely because they sell during times of stress. It is essential to recognize that market volatility is just a temporary drop for a long-term investor and be willing to stay the course during these periods.

Here’s how we can use this behavioral understanding to our benefit:

1) Many investors would say that the past 15 years have been horrible in the stock market. The reality is not so bad; if you had invested in the S&P 500 Index ETF (SPY), you would have had a 4.97% annualized return over this period. That equates to a 107% total return, a little more than a double. That’s better than most would assume, because the agony of the losses we’ve experienced is much more intense and memorable than the gains we have actually received. This phenomenon is called loss aversion.

2) If we reframe market volatility as “opportunity” rather than “danger”, then we can profit by being willing to buy when the market is down. People love buying their holiday presents when stores have a 20% sale, but when the market drops 20%, no one wants to invest. If you view a drop as a great chance to buy stocks on sale, then you will realize that the past 15 years have given investors incredible opportunities to profit. And while we shouldn’t try to time the market, we can dollar cost average by making regular contributions to our accounts to take advantage of volatility.

3) We have each client complete a risk tolerance questionnaire before investing. Our goal is to choose an asset allocation which we can stick with, through the inevitable ups and downs that will follow. It’s easy to be aggressive when the market is moving up, but it’s better to invest with an understanding of how you will feel when the market does have a correction.

4) Many investors will create a long-term investment strategy and then proceed to evaluate their portfolio performance on a very frequent basis, such as monthly, daily, or even hourly. The more often you look at your portfolio, the more often you will be tempted by the thought of “Don’t just sit there, do something!” This is where we have to recognize that the emotional, physical urge to react is at odds with the rational process of sticking to a plan. If you want to act in a long-term manner, you cannot think in terms of short-term results. For many of us, it is better to look at your accounts less often, rather than more often.

No matter what you’re feeling about the current market volatility, remember that I am just a phone call away and happy to listen to your concerns, talk strategy, and share the opportunities available in today’s market.

Data from Morningstar, as of 12/31/2015

Behavioral Tricks to Improve Your Finances

Posted On September 28, 2015 By Admin In Behavioral Finance /

I was saddened to hear of Yogi Berra’s passing last week. One of the great quotes attributed to him is “In theory, there is no difference between theory and practice. In practice, there is.” I’ve always thought this quote applied well to personal finance, where the academic expected behavior could differ significantly from the choices people make in real life.

The fact is that we all use our feelings, intuition, and past experience to make our decisions as much, or more, than we rely on logic, research, or an open-minded examination of evidence and data. Many academics take the view that any behavioral deviation from the theoretically optimal decision will lead to poor outcomes. And while that is definitely the case in many situations, my observation as a practitioner is that even the most successful individuals are not immune from this “irrational” behavior.

My point is that when theory and practice do deviate, there can still be good outcomes, in fact, sometimes even improved outcomes. Here are six ways you can use behavioral concepts to improve your financial situation. In theory, these won’t help. In practice, they will.

The 15-year mortgage. In theory, you can make more in stocks than the interest cost of a mortgage, so you should get an interest-only loan and never pay it off. Home values generally appreciate over the long-term, and there is no additional benefit to having equity in your home. Although this is theoretically correct, I suggest that home buyers get a 15-year mortgage instead of a 30-year or interest only note. The reason that the 15-year mortgage benefits buyers is that it will force you to buy a lower priced home to be able to afford the higher monthly payment. If you start your house hunt with a 15-year mortgage in mind, it might mean looking for a $300,000 home instead of a $350,000 home. The lower cost home will have lower property taxes, insurance, utilities, and other costs. More of your monthly payment will go towards principal with the shorter loan, so you will build equity faster, which is very valuable if you should need to move after five or ten years. Having a higher monthly mortgage payment will also force you to save more. By that I mean that if you had a payment that was $500 less, you probably would not save an additional $500 a month; you’d probably save only a small part of this, maybe $100 or $200 a month, and increase your spending by $300 or $400.
Set up your 401(k) contributions as a percentage. People are shockingly lazy with their 401(k) accounts. Many never change funds, and even more never change their contribution level. If you set up a $100 contribution per pay period, chances are good that five years later you are still contributing $100. If, on the other hand, you established a 10% contribution, your dollars contributed would have increased with your raises, promotions, and bonuses. If you can, increase your percentage contribution every year until you make the maximum allowable contribution, $18,000 for 2015.
Make it automatic. We are creatures of habit and momentum and will seldom change established our course. If you give someone $100,000 to invest, they will agonize over the fund choices and try to time their purchases. If the market goes down, they’ll bail out and blame the fund or the manager or something else. It’s better to set your investing on auto-pilot, invest every month into your 401(k), IRA, 529 college savings plan, or other investment vehicle. And then do what is natural for most of us: nothing. Keep investing when the market goes down. Stick with a basic, diversified allocation. That’s why people who have a created a $100,000 account by investing $1000 a month are more likely to stay on course than the investor who puts in a lump sum. Already have your investing on cruise control? Take the next step and make your rebalancing automatic, too!
Pay cash for cars. In theory, there’s nothing wrong with financing or leasing cars. However, if you get in the habit of paying cash for cars it will change your behavior for the better. It is incredibly painful to write a $35,000 check for a vehicle. If you pay cash for cars, it will force you to keep your current car for longer while you save for the next one. It will make you consider a used car or a lower cost vehicle. And it will be a strong incentive to keep your next vehicle for a very long time. Cars are often our second largest expense after housing. Most cars lose 50% of their value in five years, so would you prefer to lose half of $75,000 or half of $30,000? People don’t think this way when all they know is their monthly payment. When you pay cash for a car, you start to think like an owner and not a renter.
Do less research. One of the mental biases facing investors is overconfidence; the more research we do, the more we believe we can predict the outcome of our investing choices. This can lead to people being overweight in their company stock, getting in and out of the market, or making large sector bets. These choices often lead to increased risk taking and quite often to long-term under performance. We’re also likely to suffer from “confirmation bias”, where we cherry pick the data or articles which corroborate our existing point of view and ignore any contradictory evidence. Overconfidence and confirmation bias don’t just affect individual investors, they are significant challenges for professional fund managers. Since the majority of professional managers cannot beat the index, I don’t hold much optimism that an individual can do better. So, cancel your subscription to the Wall Street Journal, turn off CNBC, and buy an index fund.
Use “mental accounting” to your advantage. Money is fungible, meaning $1 is $1 regardless of where it is located. However, people like to divide their money into buckets for retirement, saving, spending, emergency funds, college, vacation, or whatever. In theory, this is meaningless, you’d be equally well off with just one account invested appropriately for your risk tolerance. Even though Academics would like to banish mental accounting, people are enamored with their buckets. While you should look at all your holdings as being slices of one pie, you can use mental accounting to your advantage. You are less likely to touch money when it is in a dedicated account. For example, if you put money in a savings account for emergencies, you may later be tempted to spend that money on a vacation or other splurge. If you instead put that money into a Roth IRA, you’d be much less likely to touch it. But if you did have an emergency, you could access the principal from your Roth, tax-free. The other benefit of buckets is that it may force you to do more saving when you have specific dollar goals for retirement, college, or other purposes. Then if you need to plan for a vacation, you know you will have to do additional saving and cannot touch the buckets allocated for other goals.

Use behavior to your advantage by making sure your choices are helping you get closer to achieving your goals. Investing can be simple; it’s people who choose to make it complicated. Stick to the basics and stay focused on saving and diversification. I’m not sure we can ever completely remove behavioral biases from our decision making process, but the more we are aware of those biases, the easier it is to step back and recognize what exactly is driving our choices.

Win by Avoiding These Mistakes

Posted On June 8, 2015 By Admin In Behavioral Finance /

This week, I heard an orchestra conductor say, “It’s not simple to make it sound easy.” While he was talking about music, I was thinking how this applies to investing, too. The more we know about investing and the more experience we have, the more we recognize the benefits of following a very straightforward approach. You don’t have to be a genius to be a successful investor, you just have to avoid making a couple of big mistakes. The game of investing is not won by brilliant moves, but rather by patience and avoiding the common pitfalls that lure investors in year after year.

It’s easy to recognize mistakes in hindsight. The challenge is to anticipate these outcomes in advance, so you can prevent these these errors whenever you are tempted to make changes to your portfolio. Is your decision based on a logical examination of the facts, or an emotional response or ingrained bias? You can be successful over time by following a smart plan, even if it is not complicated. Let the market run its course and know that your plan will work best when you don’t get in the way! Here are three of most costly mistakes I’ve seen investors make in the past 15 years and the solution for you to avoid these each of these missteps. These are real, actual people, but I’ve changed the names here to protect their identity. Learn from their losses!

1) Lack of diversification. 10 years ago, I met Peter who was a client of another financial advisor at my firm. Peter was an engineer at Nortel, and like many employees at tech companies in the 90’s, he received substantial stock options. For years, the stock would double and split every 18 m0nths or so, which meant that anyone who sold their stock options regretted not holding for longer. Peter had more than 12,000 options when Nortel hit $90 a share in the spring of 2000, giving his options a value of over $1 million. At every meeting, they discussed exercising his options, selling his shares and diversifying, but Peter wanted to wait longer. The stock fell to $85, and Peter finally agreed to sell, but said that he had his heart set on a higher price and would sell as soon as it got back over $90 a share.

Unfortunately, the stock never regained the $90 level, and instead lost 90% of its value over the next nine months. His options were now worthless and his hopes of retiring in his 50’s lost forever. Nortel went bankrupt in 2009 and his division was sold to competitor. Peter had the majority of his net worth in company stock and the loss truly decimated his investment portfolio and derailed his retirement plans.

It is often said that diversification is the only free lunch in investing. By being diversified, you can avoid the risk of having one stock wipe out your plans. And I should mention that this also applies to bonds. I met another investor who had $100,000 of Lehman Brothers bonds for their portfolio. As I recall, I believe the investor recovered only about 25 cents on the dollar after the Lehman bankruptcy in 2008.

Solution: Don’t let company stock – or any single stock – comprise more than 10% of your portfolio. Even better, avoid single stocks altogether and use ETFs or mutual funds. For bonds, I’d suggest keeping any single issuer to only 1-2% of your portfolio. The potential benefits of having a concentrated stock position are outweighed by the magnitude of losses if things go wrong.

2) Trying to Outsmart the Market. Luke considered himself a sophisticated investor and enjoyed reading and learning about investing. He had an MBA and felt that with his knowledge and a subscription to the Wall Street Journal, he should be focused on beating the market. He looked at his portfolio almost every day and would be very concerned if any of his funds were lagging the overall market. As a result, he wanted to trade frequently, to put his money into whatever sector, fund, or category was currently performing best.

Funds typically include the disclaimer that “past performance is no guarantee of future results”, and yet, so many investors are focused on picking funds based on their most recent past performance. In Luke’s case, his insistence on “hot funds” meant that he was often invested in sector funds. His performance over time was actually worse than the benchmarks, because in spite of all his research and knowledge, he was focused on looking backwards rather than forwards.

Solution: stay diversified and don’t chase hot funds. Typically, 65% to 80% of all active managers under perform their benchmark over five years, which means that your safest bet is to never bet on a manager’s skill but to bet on the house. Using index funds works, and adopting an index approach means you can focus on what really matters for accumulation: how much you save. Luke’s portfolio was relatively small, under $100,000. Ironically, investors with smaller accounts are often the ones who believe that they need to outsmart the market to be successful. When I worked with a client with over $100 million, he had no qualms about index funds whatsoever.

3) Timing the Market. Angelina retired in 2007, a year before the stock market slumped. In early 2009, the market was down nearly every day, sometimes losing 5% in a session. We had conversations previously with Angelina about market volatility and had implemented a diversified, balanced portfolio. On March 6, 2009, Angelina called and insisted that we exit all her equity positions. It was that very day that the S&P 500 Index put in its intra-day low of 666. In hindsight, she sold on the actual worst day possible. Luckily, we were able to convince her to buy the equities back by June, but by then, she had missed a 30% rally.

Market timing mistakes aren’t limited to selling at a low; you can also miss out when the market is doing well. Last year, while the market was up double digits, some investors had significant capital in cash, fearing a drop or hoping to profit from any temporary pullback. Those with large cash positions under performed those who were invested in a target allocation. Having looked at hundreds of investors’ performance, I have yet to see anyone who has improved their return through market timing, except from random luck. Trying to get in and out of the market gives you more opportunities to make mistakes.

Solution: Choose an appropriate asset allocation and stick with it. Invest monthly into a diversified portfolio, and don’t stop investing when the market is down. If you think you will wait until you get an “all-clear” signal, you’re going to miss out on gains like Angelina. Rebalancing annually creates a discipline to sell your winners and buy the losers, which is difficult to do otherwise!

Investing should be easy. People have the best intentions when they load up on company stock, invest in a hot fund, or try to time the market. The reality, however, is that the more complicated strategy you adopt, the more likely you will hurt rather than enhance your returns. Our goal is to help investors gain the knowledge, confidence, and discipline to recognize that your most likely path to success is to stick with a simple approach that is proven to work.

Want to read more? Check out Winning The Loser’s Game by Charles Ellis.

Are We Heading For A Bear Market?

Posted On May 18, 2015 By Admin In Behavioral Finance /

Yes, we are headed for a bear market. But, that’s no cause for alarm, because there is always going to be another bear market. That’s how markets work – we have periods of economic expansion, followed by periods of contraction. I should add that I have no idea when the next bear market will occur, but if you’re wondering if a bear market will occur, then yes, it is 100% inevitable. You’ll be happier and a better investor if you accept this fact, too.

Today’s bull market will eventually run out of steam and we will have a bear market. And that will be followed by another bull market, and so on. The key thing to remember is that the overall long-term trend is up, and that bear markets are simply a brief interruption of a permanently growing global engine.

Since World War II, we’ve had roughly 13 bear markets (a drop of 20% or more), which works out to an average of once every five years. Each one of those bear markets felt like the sky was falling and that markets would never recover, but what has actually occurred is that the S&P 500 Index has expanded 100-fold from 19 in 1946 to 2100 today.

If you are just getting started investing, you might see perhaps 8 bear markets as you accumulate assets for 40 years. And if you are now retiring, you may experience 6 or so bear markets over a 30-year retirement.

It’s easy to agree that you won’t try to time the market when the market is doing great, like it is today. But even the steadiest investor is likely to have their resolve tested if the market goes down 20%. It’s human nature to want to stop the pain of losses and just get out of the market. Unfortunately, the moment of maximum pain will be at the bottom – exactly the worst time to sell your stocks.

With so much fear in the market today, some investors are wondering if we should sell and sit in cash until there is a decline. I can’t advocate this type of strategy. Even if you are successful in getting out of the market, you have to correctly get back into the market. I’ve yet to see any fund or firm be able to do this consistently over several economic cycles. And every study I have seen on individual investors has found that a market timing approach is likely to have worse returns than sticking with a buy and hold strategy.

Some so-called experts have been predicting a bear market for several years, and if you had sold your stocks based on their advice, you would have missed out on significant gains. Even after six years of positive returns, it’s possible that the bull market will continue to march upwards. No one has a crystal ball to predict how the market will perform in the short term. Market timing doesn’t work because it requires knowledge which doesn’t exist.

What we do know is that bear markets are inevitable and what really matters is how you respond to them. That’s why it’s vitally important to have a plan in place for that future storm while the sun is shining today. Here’s our plan and what you need to know about bear markets:

1) Bear markets are a brief interruption of a larger uptrend. If you’re a long-term investor, don’t worry about bear markets.

2) Don’t make a temporary decline into a permanent loss of capital by selling. Know that we plan to stay the course. We will not attempt to time the market. We choose an all-weather allocation which we will maintain in both bull and bear markets based on your needs, goals, and risk tolerance.

3) We rebalance portfolios annually. When the market is up, that means we trim stocks and add to bonds. If the market goes down, we will buy stocks when they are on sale. Remember that we are always highly diversified and avoid both sector funds and single country funds.

4) When you hear “Bear Market”, I want you to think of two words. First, inevitable, and second opportunity. When a TV is marked down by 20 or 30% off last year’s price, you don’t think its a disaster, it’s a chance to buy something you want at a lower price. Take advantage when the market puts stocks on sale.

Have faith in the future. Not a blind naivete, but an understanding of history and an appreciation for the opportunity which bear markets bring to us. The key question is not whether or not we will have a bear market, but if you are prepared and know what to do when we eventually do have one.

Retiring Soon? How to Handle Market Corrections.

Posted On March 2, 2015 By Admin In Retirement Planning /

I was recently asked “How would you protect a soon to be retired investor against the inevitable market correction that will occur in the next couple of years?” It’s a great question and I think it’s very important that investors understand the risks they take when investing. Having not had a significant correction in six years, we may be well overdue. Of course, some forecasters have been calling for a correction for a couple of years, and yet the S&P 500 was up 13% last year and 32% the year before. That’s the problem with trying to time the market – it’s not possible to predict the future and it’s too easy to miss good returns by sitting on the sidelines. So, how should investors position their money if they’re a couple years from retirement?

The first thing is to frame the investment portfolio in a broader context. Someone who is four years from retirement does not have a four-year time horizon, but more likely, a 30-year time horizon, so we want to focus on finding the best solution for the whole 30-year period. That means we have to balance the desire for short-term safety with the long-term need to keep up with inflation and not run out of money. While retirement may be a one-time event, retirement planning is an on-going process.

In addition to withdrawals from accounts, retirees will have other, guaranteed, sources of income, such as Social Security, Pensions, or Annuity payments. These may cover a significant amount of fixed expenses, which allows the investment portfolio to be used in a somewhat discretionary manner during retirement. With corrections occurring every 5 to 6 years on average, a retiree could experience five or more corrections over the course of a 30-year retirement.

The reality is that we have to be willing to accept some level of volatility in a portfolio in exchange for the potential for a higher long-term rate of return. We start with a risk tolerance questionnaire to get to know each client and help select a target asset allocation that will be the most likely to accomplish their financial objectives with the least amount of risk. There’s no magic bullet to give investors a great return and no risk, so it truly is a decision of selecting an acceptable level of risk that will fulfill their planning needs. Almost everyone needs to have a mix of safer assets and assets which offer an opportunity for higher long-term growth. Some of my clients have 50 percent or more in bonds, and that may work for their situation.

With the portfolio construction, I am very focused on creating a strong risk/return profile for each of my models. We diversify broadly to reduce correlation of assets and systematically rebalance each portfolio on an annual basis. Rebalancing provides a discipline of selling assets which have run up and buying assets which are cheaper. We can eliminate some types of risk altogether, including company-specific risks (by owning the whole market rather than a handful of individual stocks), and manager risks. We know that typically 65-80% of equity managers under perform their benchmark over five years, but since we don’t know which managers outperform in advance, choosing managers is simply not a good bet to be making. That’s why we use index funds rather than selecting “five star” fund managers for our core holdings – it puts the odds in your favor.

We buy Low Volatility ETFs for some client portfolios, and I think many investors would be interested in learning about ways to reduce market fluctuations. Low Volatility funds select a basket of the least risky stocks from a larger index. They’re designed to offer a return similar to traditional indexes over time, but with a noticeably lower standard deviation of returns. They’re fairly new strategy (available the last three years or so), but I think are one of the more compelling ideas in portfolio management today. Read more here: http://www.ishares.com/us/strategies/manage-volatility

Lastly, when working with a new client, we can dollar cost average over six months, so if we do have a pullback in the fall (as we did last October), we would have cash to put to work. The key is that even someone who is planning on retiring in the next couple of years needs to have a clear plan that addresses both their accumulation needs and a retirement income strategy. That’s our focus at Good Life Wealth Management and we’d be happy to meet with you and discuss how to accomplish your retirement goals.

Adversity or Opportunity?

Posted On October 21, 2014 By Admin In Behavioral Finance /

In the past two weeks, market volatility has spiked and major indices have traded down 7% or more. I follow the market closely and monitor the situation for news which might impact our portfolios. Generally, I prefer to use this space to discuss beneficial financial planning topics, but I know that everyone is wondering about the market, so here is my take on the situation.

The recent pull-back has been relatively minor and probably long-overdue, given that we’ve gone five years since a significant correction. The good news is that stock fundamentals are strong and the US economic recovery remains in place, although actual growth is somewhat tepid. While equity prices have risen, valuations are within a normal range and not at the elevated levels we saw in previous bubbles. With interest rates remaining extremely low, “risk” assets like stocks still offer greater potential return than cash or fixed income.

Having shared my opinion, I have to say that it really doesn’t matter what I think will happen. Anyone who thinks that data is “proof” of what the market is going to do is fooling themselves. No one can predict the market. Fortunately, long-term investment success does not require a crystal ball. What it does require is a well-researched and executed plan, a diversified allocation, and most importantly, the fortitude and discipline to stick to your plan.

I was asked this week if I got my clients out of the market before the recent turmoil. No, I didn’t and I didn’t sell any of my own stock positions, either. I was doing the opposite this week: buying in a number of portfolios. And I was quite happy to have the opportunity to pick up ETF shares 5-10% lower than they cost just three or four weeks ago. I’m focused on the long-term opportunity and not the present adversity. Although I don’t know where the market will be one month from now, I strongly believe that the market will be significantly higher in 10 years from now and that is what really matters.

So rather than worry about the troubles of the day and the things you cannot control, I believe investors are best served by focusing on the things you can control, such as:

establishing a target asset allocation to match your risk tolerance, required return, and time horizon;
diversifying to eliminate company-specific risks;
keeping investment expenses low and reducing tax drag to a minimum; and
how much you save and invest.

Of these four, the last one is crucial to your individual success. The news tends to make us focus on trying to improve short-term investment performance, instead of how much you should be saving. If your goal is accumulation, it’s more important to be thinking about how to increase your saving than how to increase your return. We have to learn to ignore the noise of the daily media so we can stay focused on how to achieve our long-term objectives.

Optimism is key. Not a blind naivete, but the confidence to know that you are on the right path, and the recognition that sometimes the path is uphill. I remember a bit of wisdom I heard years ago “You make your money in bear markets, you just don’t know it until later.” If you’ve got five or more years to retirement, you should welcome each pullback in the market as a tremendous opportunity.

With this understanding, there are some small ways to take advantage of the recent market turmoil and use the recent drop in prices to your advantage:

Put excess cash to work; if you haven’t made your IRA contribution, now is a good time.
Rebalance your portfolio.
Swap losing positions to harvest tax losses; replace your high expense funds with tax-efficient, low cost ETFs. Use the downturn as an opportunity to clean up your portfolio.
Add Emerging Market equities, if you don’t have any. EM is down more than domestic equities and has lagged for several years.

Market timing may be an alluring mirage, but ultimately is a counterproductive distraction for investors. If you’re able to take advantage of the pullback, that’s fine, but if you’re already invested, don’t think that you have to “do something”. Most of the time, doing nothing is ultimately the best option!