|Are your ready to get your head out of the sand and face that 201(K) that you once called your 401(K)? In my last e-zine, the subject was “Controlling What You Can in Uncertain Times – Cash Flow as Your Financial Foundation.” Hopefully, I have given you some insights into how you might stabilize the one area of your personal finances that you are most able to control. Now let’s face one aspect of your personal finance you can’t control – the markets. You’re already clear that “Buy high and sell low” is a bad but common strategy. And you certainly have no interest in selling on bad news and locking in your losses. But what’s the alternative?Ideally, before you ever made any investment purchases you, you understood that your portfolio could go up or down. And then the markets took a tumble that more closely represented financial Armageddon. Most likely you realized that you did not have the tolerance for risk that you had thought you had. Or at least the 17% potential for gain/loss was easier to stomach when it was a 17% gain. Your response might have been to pull out of the market entirely or to hide your head in the sand.If you’re ready to come up for air, I would like you to reconsider your risk tolerance. Perhaps you’re not a moderate aggressive investor but more like a moderate to conservative investor. Better defining your risk tolerance will allow you or your advisor to compile a portfolio more appropriate to your real risk tolerance. Second, I would like you to consider your needs for your emergency fund and cash for the next 12-24 months. That money should not be included in your investment portfolio although it does make sense to keep the funds at the same financial institution.
Finally, I need you to reallocate your portfolio. That means you will look at your portfolio to check the percentages of investments by investment category i.e. cash, bond, stocks – in either ETF’s, individual stocks, or index funds. This is your current asset allocation. Now you – or your advisor working with you — have to determine the right allocation model for you. That’s your roadmap for rebalancing. Simply apply the new asset allocation to your portfolio by calculating the amount that you must buy or sell of each respective investment category.
Did you notice that nothing stated above refers to timing? Instead of doing all your reallocating at once, I suggest you dollar cost average over 3-12 months. I want you to be in the market to the degree that you’re comfortable. That means reducing your risk, by changing your asset allocation, as you can afford to, rather than trying to decide when it will be O.K. to get back in the market.
That’s part of what we mean as financial advisors when we say we bring the pieces to together. We look at the impact of your investments, not just on your ability to sleep at night, but also as a piece of a total financial plan that must consider how much you have saved, can save and will need in the future to be financially secure.