Avoid
the Market Carnage: Stick to the Plan
by Walter Updegrave
March 21,
2008
A
diversified strategy and periodic readjustments will help you
steer clear of market madness. Tune out all the noise and stick
to the game plan.
Question:
I generally review my portfolio twice a year to see if I need
to make any adjustments. But given that the market has been down
in recent months, I'm wondering whether I'm better off waiting
until the market rebounds or sticking to my usual schedule. What
do you think? – Todd M., Bryan, Ohio
Answer:
I assume that when you talk about adjusting your portfolio twice
a year, you mean that you're rebalancing to bring your mix
of stocks and bonds back to its original proportions.
And
if that's the case, then the strategy you've been following up
to now makes perfect sense to me. As different investments earn
different returns, your portfolio's proportions will shift over
time. So you periodically need to sell some shares of investments
that have done relatively well and plow the proceeds into those
that have trailed—or just funnel new money into laggards—to
bring your portfolio back to its proper balance of risk vs. return.
Granted,
one could argue about which of the many different rebalancing
strategies available is the most effective. (I'm a member of the
"once a year is enough" club myself, mostly because
it's easy and investors are more likely to stick with what's simple.)
But the most important thing is that you're consistent—that
is, you choose a method and then stick to it.
All
of which is to say that I believe you ought to think twice—or
maybe even three or four times—before you abandon your current
strategy.
I
can understand why you might have the urge to change your game
plan. You're no doubt hoping that by waiting a bit some
of your battered investments will recover and you won't
have to realize losses.
But
the whole point of building a mix of different types of assets
based on your goals, time horizon and risk tolerance, and then
rebalancing back to that blend on a regular basis is that you
can't predict the future. You don't know when the
market will fall or when it will recover. You don't know
the best time to get out of stocks and into bonds or vice versa.
You don't even know when it's the ideal time to rebalance
your portfolio, except in retrospect, of course.
So
to deal with that lack of knowledge, you create a strategy, a
disciplined system that can help guide you through the uncertainty.
I
know that some people may see this as a head-in-the-sand approach
especially given what's been going on lately, what with
major investment bank Bear Stearns getting snapped up at a fire-sale
price, the Fed scrambling to keep the economy afloat and investors
worldwide wondering what the next shock might be.
After
all, in fast-moving and perilous times like these, don't
you have to be most nimble, most flexible, most willing to try
something new?
Actually,
no. It's in times of crisis when you most need to stick
to your plan. The far bigger danger in a volatile market like
today's is that you end up making a move that seems brilliant
at the moment but turns out to be not so smart in the future.
Or,
if you really get into the spirit of second-guessing your plan,
maybe you end up making a series of such moves as you react differently
to each crisis du jour.
That's
not to say you can't ever deviate from your plan. If you find
that you don't have the stomach for risk you thought you had when
you created your portfolio—it's not unusual for investors
to overestimate their appetite for volatility when the market
is doing well—then maybe you need to scale back your stock
holdings a bit. And if that's the case, there's no need to wait
until you make your usual adjustment.
Similarly,
if you've concluded after careful deliberation that some
of your stocks or funds are clunkers that need to be replaced
quickly, then replace them as soon as you find acceptable substitutes.
You might even want to occasionally sell some holdings in taxable
accounts to reap tax losses that can be used to offset other gains
or even ordinary income.
But,
remember, if you stray from your game plan too often and begin
basing your rebalancing decisions on gut feelings about what the
market may or may not do and when it might or might not do it,
then you don't really have a plan anymore. You're
just playing hunches.
The
opinions in this article are for general information only, are
not necessarily those of Mutual of America Life Insurance Company
and are not intended to provide specific advice or recommendations
for any individual. Consult your attorney, accountant, or financial
or tax adviser with regard to your individual situation.
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