Steve Webbel, Flikr

You would certainly be within your rights to question the best course of action to take right now.  The market has shown some real muscle over the last 2 months. But it was so brutal prior to that it’s hard to know if it’s really safe to invest now.

I wrote an extensive piece on this subject last week at Christianpf.com.  In it, I describe two different investment approaches – technical and fundamental.  I provided a full explanation of these terms at the link above and I encourage you to read the article.

So why am I writing about this now?

Well, I received a particularly well thought-out email from Dan, a Wealth Pilgrim from the East that made me think about the dilemma that many investors find themselves in:

“I’ve been getting a bit leary.   I’m always nervous when things start getting too good. I really don’t want to lose what I’ve gained.”

” I sure don’t know what “smart money” really means right now, but I certainly do not want to revisit the situation of the past couple years and feel dumb.“

I realized that Dan probably isn’t the only one with questions like these so I thought you and I should have a chat.

So tell me, how would you respond to Dan? Would you tell him that he’s right to be concerned?  If so, would you tell Dan to cash out now?  Or would you tell him that he shouldn’t worry about the market?  You have to admit, Dan’s question is  hard to answer (that’s why I’m asking you for help….)

While you’re thinking about it, I’ll take a stab at it.

I believe that the only sensible approach to the market right now is …….to re-visit your ultimate goals.  If you are retired and want your money to last at least as long as you will, think about your lifespan as your investment horizon.  It’s really impossible to know what the market is going to do in the next day, week, month or year.

If you try to outsmart this market – good luck.    Here’s an approach that is probably more likely to serve your needs:

1. Make sure your investment mix balances your long-term goals with your short-term appetite for risk.

If you decide to ratchet risk down by diversifying out of stocks, do so with (at least) a 10-year game plan  in mind.  And if you do ratchet the risk down, please don’t compare your returns to the market – especially not on a monthly, quarterly or annual basis.  You can’t have your cake and eat it too.

2.  Keep withdrawals under 4% for now.

If you can keep your withdrawal rate to 4% or below in this market, I believe you are in fine shape (I can’t promise this….but history is on my side).  So, if your portfolio is $100,000, your maximum withdrawal for the year should be no greater than $4000.  If you keep to this limit, the chances are high that you will be able to continue making these withdrawals without jeopardizing your retirement nest egg.

3.  Play the odds.

Investors suffered over the last decade.  Stocks actually had a negative return over the last 1o years.  Please understand that this is a rare occurrence.  Of course, the next ten years could be equally as bad or worse but the odds are against it.  Contrary to what you are feeling right now, statistics are in your favor if you are an investor now.

4. Ignore the news.

I could be wrong on this.  I’ve been wrong before.  But I suggest you ignore the news.

The doom and gloom guys tell you they called this one right…and maybe they did.  They point to all the bad news and they point to the market carnage and tell you “I told you so!”  But they don’t tell you about all the times they got it wrong.  Historically, more money has been lost anticipating a bear market than in a bear market.  The dismal results of the last decade don’t change that fact.

I happen to know Dan and I know he’s got a strong investment approach.  Stick to it Wealth Pilgrim of the East.  The road ahead will likely be an uneven one.  It will be rough no doubt, but you’ll arrive at your destination quicker and safer if you follow your road map.

What other options does Dan have?  Would you echo my suggestions or do you think he should take another route?

Like this article? You will love getting my free brilliant financial updates! No spam, and I won't give your email address to any other person or company.That's a personal promise. Neal Frankle, Certified Financial Planner, Los Angeles, California

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