With the volatility that US and worldwide stock markets experienced during 2018, it is important to maintain your long-term asset allocation plan between stocks and fixed income.
Maintaining your asset allocation, and regularly rebalancing your portfolio, should be an annual New Year’s resolution, whether markets are going up or going down.
To maintain your asset allocation means investors should be buying stocks when markets have decreased, and incrementally selling stocks after significant market increases.
As stock markets went down in 2018, we have reviewed, and will continue to review, our clients’ portfolios to buy stocks, to rebalance their portfolios back to their planned asset allocation.
When stocks are declining, buying stocks may seem difficult. You cannot know if they will continue to fall further. Stocks may have dropped but we may still be in the midst of the decline. This is where discipline and having a long-term perspective can be beneficial.
By buying stocks to rebalance after a significant market drop, you are following the buy low, sell high strategy. This is where we as your advisor can add value to your long-term financial progress.
For example, if an investor had a $2 million portfolio that was allocated 60% to stocks and 40% to fixed income, their portfolio would be $1.2 million in stocks and $800,000 in fixed income.
If the stock portion of this hypothetical example declined 15%, then the stocks would be $1,020,000 and the fixed income allocation would still be $800,000, assuming no fixed income change.
The portfolio would now be worth a total of $1,820,000, so a 60% target allocation to stocks should be $1,092,000. To rebalance the portfolio would require selling $72,000 of fixed income and purchasing $72,000 of stocks to maintain the intended 60/40 asset allocation goal developed as part of the planning process.
If you are a client, we have designed a financial plan with you, which we call an Investment Policy Statement (IPS).
If you are not a client, do you have a financial plan? If not, maybe you should contact us and discuss why this is so important.
It’s important to remember that bear markets and down periods are a feature of the stock market. If we were to look back at every previous market decline, some investors would think it is an opportunity and other investors thought the light at the end of the tunnel was a truck coming the other way.
In each past instance, the truck coming the other way wasn’t the outcome. It’s likely that this is not the case now either. In other words, every past decline looks like an opportunity; every current decline feels like risk.
Resolve to rebalance as needed, or work with an advisor who does this for you.
Resolve to think long-term. Resolve to adhere to your long-term investment plan.