When the market drops, it does more than shrink many investors’ portfolio values. It also shiCredit: Image: ddpavumba / FreeDigitalPhotos.netfts the asset allocation balance inside individual portfolios.
Asset allocation may contribute more to your portfolio’s well-being than choosing an individual stock or timing the market, so maintaining a correct allocation becomes even more important during turbulent market periods. Proper asset allocation means the most effective division of your capital among stocks, bonds, cash and real estate and making the right changes based on your age, risk tolerance and goals. What might have been a suitable asset allocation five years ago may no longer be the most advantageous way for you to divide your assets now. Furthermore, many investors are nervous about keeping money in stocks, even if that’s the place where they have determined they should allocate some of their funds.
What Should You Do?
Adjusting your portfolio for today’s market doesn’t necessarily mean selling out and keeping everything in cash. There is a fine balance between an investor’s current risk tolerance and future comfort level. Meeting with a qualified financial adviser can help you establish your risk level and establish a proper asset allocation. If you haven’t reviewed your portfolio in the past half-year, now is time to scrutinize your holdings, and if need be, promptly implement any changes.
Updating your asset allocation often means selling stocks and/or making purchases. While “buy low, sell high” may be tried and true fiscal advice, you aren’t alone if it’s difficult to “bite the bullet” and invest in a depressed market. On the other hand, some hold onto their losers in hopes of regaining their losses. Others don’t want to sell stocks at a loss because it’s an admission that they made a mistake.
While losing money is never pleasant, it’s important not to dwell on the past, but prepare for the future. Decide what your ideal asset allocation is now, and adjust your portfolio accordingly. Aim to own a portfolio of assets that have the potential for solid gains. And, when market conditions or your goals change, make sure to adjust your asset allocation accordingly.
If you are not sure how to work out your risk factors and what is the best allocation strategy for you, read: A Question of Risk Strategy?: How Do You Know What’s Best for You?
Disclaimer: This article is for educational purposes and is not a substitute for investment advice that takes into account each individual’s special position and needs. Past performance is no guarantee of future returns.