Be Thankful For Your Harvest
Investing is easy, all you have to do is buy low and sell high right? Right, except that is not what the average investor does. Time and again investors have seen markets rise and thought “nothing can stop this train”, piling into stocks near the top of the market. On the other side at the deepest depths of a bear market, investors may think, stocks will never come back and I should keep my money in cash.
The truth is, investing is highly emotional for people which clouds rationale thought. Everyone has heard the story of the guy who was up at the blackjack table but didn’t walk away. If only their friend had tapped them on the shoulder and said, that’s enough. Like being up at the casino, we think it is important to know when to walk away. Unlike a casino though, a well balanced portfolio doesn’t have to be moved entirely to cash, you can still leave money invested and working for you.
When building a portfolio, risk is one of the most important things to consider and something an investor has control over. Risk is managed by having ‘risky’ investments like stocks, and more conservative, ‘non-correlated’, investments like bonds. Non-correlated simply means investments will not necessarily move up or down at the same time and may move in opposite directions. So when stocks are going down, a non-correlated bond fund will stay flat or may even go up. This mix of assets can help you estimate potential volatility in a portfolio. All investments carry risk but knowing how your investments will work together, can help you manage that risk.
It is important that an investor work with a CERTIFIED FINANCIAL PLANNERTM professional to build a portfolio customized to your risk tolerance. This will dictate how much exposure you can have to riskier assets like stocks. Then, when stocks rise in value like we have seen this year, you can sell what they have earned and add the proceeds to your bonds. By doing this a couple times throughout the year, you may not be riding a market to the very top, but you are systematically capturing gains. If stocks continue to rise after you have taken gains, you still have a portion of your portfolio allocated to those stocks leaving you with opportunity to earn more money.
In a bear market, when stocks go down, this process is reversed. You would pull from your assets that now make up a larger part of the portfolio than your risk tolerance suggests, typically bonds, and add it to stocks. Because the stocks have gone down in price, you are likely able to buy at a better value. This is the buy low part of buy low sell high. It takes nerves to enter a market at this point which is why it is helpful to have a risk profile guiding you on when to enter the market. You may not buy in at the very bottom of a bear market, but you will certainly be paying less.
This is a very basic outline of portfolio construction and asset allocation. There are many other variables to consider such as taxes, asset types, and strategies built into some mutual funds. Rebalancing should be done carefully and with purpose, aiming for a specific target.
So, this Thanksgiving season be greedy with turkey and mashed potatoes, be grateful for having participated in the market rally, and harvest your gains.
*Investments are subject to risk, including the loss of principal. Because investment return and principal value fluctuate, shares may be worth more or less than their original value. Some investments are not suitable for all investors, and there is no guarantee that any investing goal will be met. Past performance is no guarantee of future results. Talk to your financial advisor before making any investing decisions.