I have never seen any statistics about the percentage of Americans, who catastrophize. These are the people who tend to tear themselves apart about setbacks, or even imaginary setbacks, which makes them seem far worse than they are.
I am one of those people. When my daughter started driving, I worried a lot about her getting in a terrible car accident. When I moved to San Diego in the early 1990s, I worried that my career in journalism was over. And I’ve got lots of other examples that I won’t foist on you.
But I haven’t been freaking out about the recent stock market meltdown. Even though I’ve lost what seems like a lot of money on some recent days, it’s most definitely not gnawing at me.
Here’s why: For years now, I’ve been investing defensively. I don’t try to hit home runs because that requires making narrow bets on the market, such as guessing that small-cap stocks, or blue chips or REITs are going to break out of the pack. Instead of putting all my money on whatever is hot or expected to be hot, I spread my bets across the investment categories I just mentioned, as well as others. This way I can try to even out the ups and downs when the market starts doing it bungee jump impersonation.
Of course, the way to spread your bets is to diversify. I’ve addressed this issue plenty of times, but I wanted to suggest a resource for those wondering how much they should put in each investing cubby hole. IndexFunds.com maintains a lot of model portfolios on its web site, but the ones I want to draw your attention to today can be found here.
One aim of the illustration is to compare Vanguard index funds to Dimensional Fund Advisor funds. While DFA funds are wonderful, very few investors can access these passive-like funds because you need to go through certain fee-only advisors. Vanguard index funds is the next best thing.
What I’d like you to pay attention to are the 20 model Vanguard portfolios that were assembled based on people’s risk tolerance. If you aren’t sure how to diversify, you can certainly borrow ideas from this .
Keep Your Cool
What’s also helpful during these periods of market turbulence is to maintain some perspective. It’s great media when the market swings 200 points one way and then 200 points the other. Volatility is vastly more interesting than during weeks when the Dow Jones Industrial Average only moves sideways.
Despite all the front-page headlines, however, the Standard & Poor’s 500 Index has still made money for its investors this year. Year to date, the S&P 500 is up more than 3%. Small-cap stocks and international stocks, despite being buffeted, are up for the year too. And three and five-year records for all these investment categories are excellent. What’s far more important are the long-term records.