08.10.07
Don’t Panic
Boston.com is headlined with the news, “Stock prices fall again” with a subtitle of “Time to review your portfolio?” For most people, that is the worst possible advice. Too many small investors sell after a big drop in the market, then stay on the sidelines until the market is nearing its next peak. They chase the “hot” sectors, ensuring massive losses when those sectors ultimately cool.
Is your portfolio appropriately diversified? David Swensen recommends that no more than 30% of your portfolio be parked in a single asset class (e.g. US stocks, international stocks, real estate, bonds, TIPS). My own target allocation, with a focus on long-term growth, is roughly 40% US stocks, 20% international, 15% real estate, 25% bonds/TIPS/cash. Your own situation might easily be different, but one essential principle applies: if your portfolio was appropriately allocated in June, it is appropriately allocated today.
This is the wrong time to suddenly decide that you have too much in stocks and too little in cash. Portfolio allocation is a long-term decision that should not be made on the basis of short-term market swings. If your allocation needs adjustment, then find a time when the market is not playing havoc with your emotions to make the change. Until then, pick up a beer, turn a baseball game on the radio, and pick up a copy of Hitchhiker’s Guide to the Galaxy. Oh yes, and DON’T PANIC!
Spok said,
August 11, 2007 at 9:08 pm
‘Course, one problem is that, if you’re like me, you may forget about, or simply not get around to, the reallocation you decided was a good idea earlier, once things go quiet again. (I decided a while ago I should have a higher allocation in international stocks, but because of difficulties arranging this with my university’s plan, never got to doing it…)
But if you’re in the stage where you’re regularly paying into your plan, now *is* as good a time as any to reallocate your *contributions*, assuming you’ve put some good thought into what your overall balance should be and aren’t just reacting in panic now. The idea is, if you have a goal of certain percentages in various asset categories, to allocate your contributions to overweight (some, but not excessively) the ones that you want more of, and underweight the ones you want less of, so that over the course of the next several months or few years, you’ll end up where you want to be– but you’ll have effectively made the shift gradually, and in a way that tends to smooth out the peaks and valleys.
I’ve done this once for overall stock allocation, over the course of a few years, and it worked fairly well. The nice thing is it was a one-time decision I could largely set and forget (except for checking now and again to see if I’d reached my target).
Steve said,
August 15, 2007 at 12:45 am
I thought this article would be in reference to the Bosox and their current position in the standings … although it is still a useful piece of advice for the stock market as well.