Chicken Little and The Stock Market Swoon

It’s no secret that the stock market is extremely volatile. The only guarantee is that it will go up and down, and wide swings can make even the savviest investor nervous. Sometimes it’s enough to make you want to pull out everything you’ve got.

The Sky is Falling

The 24/7 news cycle inflames investor concerns by trotting out prognosticator after prognosticator, claiming to know exactly what the market is going to do next.

To us, these guys often sound like Chicken Little. You remember Chicken Little, right? He was a fairy tale character that ran around like crazy yelling, “The sky is falling! The sky is falling!” But, as it turned out, the sky really wasn’t falling.

Wisdom from a Cartoon

Several years ago, Disney released its own movie version of Chicken Little’s story. If you have young kids or grandkids, you may have seen it. In it, just like usual, Chicken Little claimed the sky was falling. But this time he was right. The plot involved acorns, space aliens, trust between children and adults, the voice of Adam West (yes, the ‘60’s Batman, Adam West), and…well, never mind. Just trust us, the sky was definitely falling.

So when the numbers look scary and panic starts to set in, you have to decide: is the stock market sky really falling, like in the Disney movie, or is it just a false alarm, like in the old fairy tale?

Counting on the Stock Market

Dear FedNav,

I am very concerned about the stock market. I am 55 years old. My wife and I plan to retire in the next five to seven years. I have built up about $500,000, mostly in manufacturing stocks. I’m counting on these stocks to provide for my retirement. With the market as scary as it has been in the past, should I stay in or get out while the getting is good? I feel like the sky is falling.   

Scared Silly in Maine

Dear Scared,

The stock market is always going to go up and down. Whether these are rolling hills or huge peaks and troughs depends on how diversified you are and how much time you have in the market. Since you don’t need to start spending your cash for five to seven years, you have a pretty long time. However, you seem to be over-weighted in manufacturing stocks. This is worrisome, because the more concentrated your investments are, the more likely it is that they will experience large ups and downs.

Don’t Rely on The Stock Market: Diversify!

It sounds like more diversification (for instance, other stocks, bonds, real estate, cash) might be in order. To be sure, you should consult a financial planner who specializes in retirement planning.

While we don’t know all the specifics of your situation, here are some ways our clients have been able to better protect their investments when it feels like the sky is falling:

Invest for the long term.  Markets go up and down, and though no one can predict the future, if you have five years or more before you spend all your money, the markets are likely to come back.

Diversify. A portfolio with various types of stocks, bonds, real estate investments, and cash positions will not fall in direct proportion to the negative returns you see on television.

Consider insuring your investments wherever possible and appropriate. You insure your car, your home, and your health. Insuring your investment income can be appropriate as well. One of the ways to do this is through investments made by way of riders on variable insurance contracts, which come at an additional cost. Guarantees are backed by the claims paying ability of the issuing company.

Just like any other investment…

…you want to make sure that all your eggs are not in one basket. The stock market is a prime example of this. One can never predict exactly what will happen, because past results are not indicative of the future. The only thing you know for certain is that it’s going to change. To make sure you’re prepared, you want to look ahead for the long term and diversify your investments. That way, even when the stock market takes some pretty big swings up and down, you won’t have to feel like the sky is falling.