It has nothing to do with the market, and everything to do with your personal circumstances. The chief executive of Ariel Investments earned huge profits on newspaper stocks in the s, and by the mid s Ariel had become the largest shareholder in McClatchy Corp. Even as warning signs mounted—the company carried high debt levels and profits were declining—Rogers held on, hoping for a turnaround.
Individual investors would be wise to take note. Whether you invest in individual stocks or through mutual funds, wise investing requires selling and reinvesting your proceeds at regular intervals. For most people, savvy selling has little to do with stock prices.
Then, whether the stock market plunges or soars, you can adjust your portfolio without making an impulsive decision. Likewise, the bond holdings might be divvied up among corporate, Treasury and foreign issues. The right mix of investments will vary based on the age and goals of the investor, as well as on his or her feelings about risk.
Your carefully chosen mix is now out of whack. You need to rebalance. To keep things simple, we assume the money was invested in those indexes. A study of investment returns from through found that a rebalanced portfolio boosted returns by an average of 0.
The precise advantage of rebalancing varies based on the targeted asset mix, but the strategy consistently beats portfolios that are not rebalanced for a simple reason: An asset class that has performed far better than its long-term average for a few years is likely to perform worse than the average for a time. Advertisement Of course, the more comfortable, albeit irrational, move is to do the opposite, says Chris Brightman, head of investment management at Research Affiliates, a Newport Beach, Cal.
If you want to be smart about rebalancing, you need to be aware that a lot of people act irrationally—at least for a while, Brightman says. But that phenomenon lasts for months, not years. Rebalance, but not more often than once a year, says Brightman.
Because tedious projects like rebalancing are easy to forget, many planners suggest that you set a regular, and memorable, date to do it. Make it your birthday. What matters is that you establish a routine and follow it. Scenario 2 You moved, had a baby, lost a job or got divorced. You need to beef up emergency savings. If those factors change, so should your investments.
It really depends on the event and you. However, if a spouse dies or the couple divorces, the need for emergency savings could skyrocket.
A single person should have enough emergency cash to cover twice as many months of potential job loss. So a suddenly single individual may want to boost dramatically the percentage of his or her assets in safe, albeit low-yielding, accounts.
The best strategy here is to step back and carefully review your financial plan and goals from start to finish. You need to replenish the fund you tap for living expenses. After decades of saving, you got the gold watch. For starters, a good portion of your monthly paycheck will now come from savings rather than from an employer.
This, too, demands selling some stocks, even if you already have five years of spending power in accounts holding bonds and other conservative, fixed-income investments the standard recommendation. Perhaps when a volatile asset class, such as emerging-markets stocks, has a particularly good year triggering the need to rebalance anyway , you can sell some of those shares and use the proceeds to cover your spending or feed the fixed account.
Rowe Price, the Baltimore-based mutual fund giant. Remember that a good portion of this money is earmarked for spending in the second half of your retirement, which might be decades away. Over long periods, stock returns are far more likely to beat the rate of inflation and allow you to retain buying power. You need to relax about investing. The most successful or luckiest investors can take a cue from the world of sports. After all, the game is won. Why risk fumbling the ball?
Investors in the later stages of their retirement who know they have plenty of money to cover every possible expense can do much the same. To be sure, some investors with more than enough money to sustain them will still choose to invest a meaningful portion of their assets in stocks, figuring that any excess return will help them leave more to their heirs. You can stop playing. Selling can trigger a tax obligation. The tax consequences can have a major impact on just how much of your investments you need to sell to cover the cost of your car, trip or high-end kitchen.