Greece, China, Puerto Rico, the sudden long drops, followed by the upside down turns of the global marketplace is not thrilling. In fact as an investor it is a time when many people scream, “Stop the ride I want to get off!”
Before you get off the ride, though, you might want to review your asset allocation along with your risk tolerance. Getting off the ride when the market is down means you’d be selling low.
This might be the time to sit down with your financial advisor and rebalance your portfolio. If you haven’t done that in awhile, or never, it is that counterintuitive process where you sell winners and buy losers in order to achieve and/or maintain the desired asset mix. Do you have enough cash on hand? Are you properly allocated between stocks, bonds and alternative assets?
Even if your gut is telling you that you want off the roller coaster, don’t let fear be your guide. If you sell now, you may have miscalculated your risk tolerance in the first place. That’s common when the market is performing well and novice investors think they’ve got the stomach for the long-term ride.
You have to understand that market volatility is a constant. The cacophony of the current events in Greece and China should be ignored unless you’re heavily invested. However for the most part, these two countries represent at most 1 or 2 percent of the most investor’s portfolios. Don’t let the panic of other markets influence your decisions. Talk with your advisors. Get a real picture of what’s going on.
As a matter of fact, the 10 largest diversified international funds have less than 9 percent of their portfolios allocated to Chinese stocks and even lesser amount to Greek equities, according to Morningstar, a mutual fund research firm.
Keep in mind your investment objectives before you decide to jump out of the market. And also take into consideration that rebalancing your portfolio comes with trade-offs. While doing so can cut the risk of your portfolio and may help you stick to your financial plan, you could also incur capital gains taxes from selling appreciated assets in taxable accounts as well as transaction costs to execute your strategy.
According to a 2010 study on the benefits of rebalancing by the Vanguard Group, "Just as there is no universally optimal asset allocation, there is no universally optimal rebalancing strategy. The only clear advantage as far as maintaining a portfolio's risk-and-return characteristics is that a rebalanced portfolio more closely aligns with the characteristics of the target asset allocation than with a never-rebalanced portfolio. As our analysis shows, the risk-adjusted returns are not meaningfully different whether a portfolio is rebalanced monthly, quarterly, or annually." (http://www.cnbc.com/2015/07/10/time-to-rebalance-your-retirement-portfolio.html)
If your investment strategy is still in line with your objectives, you may just want to hang on and see the ride through. Doing nothing in volatile times is often the very best thing to do.
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