Markets declined at a historic pace last month. Did you look at the rapid decline in your investments—your means of retirement subsistence—and feel a flutter of panic? Confidence and contentment are natural when markets are advancing; not so much as paper losses mount.
Financial experts tell us to remain calm and stay the course when that happens. The arrangements we’ve made, they say, are as prudent and useful in bad times as good. Splitting up investments across multiple asset classes, company sizes, and tax efficiencies is a smart practice. As has been noted elsewhere, a broad allocation can feel like running uphill with a weighted vest on, but it sure feels good in a downhill slide.
Still, we are, in the quiet of our thoughts, alone and prone to second-guessing the choices we’ve made, or might fail to make. What if the markets, having surged back this far, are about to take another significant fall? Should I step off the roller coaster here, closer to the peak?
At the same time, doing nothing feels like a choice, too, and not a particularly good one. I’m a smart investor—or a lucky one, at least—I should be doing something now.
Such thoughts have been the downfall of many investors. Those exiting their investments after declines and remaining out for fear of losing more lock in their losses as markets move higher.
I could rest easy if I invested in a target-date fund whose primary feature is set-it-and-forget-it. Professional management keeps the fund’s internal allocation appropriately balanced for the target retirement date regardless of market conditions. I have only to restrain myself from bolting the market altogether.
I have more on my mind if, on the other hand, I’ve decided to self-allocate my investments across asset classes.
Here’s a handy bit of make-work to occupy myself with something beneficial while markets remain in turmoil: Rebalancing my allocation back to what I’d previously set. If I’m not in the habit of periodically doing this, now’s a great time to begin.
If I had set, say, a 75-percent stock, 25-percent bond allocation, and further, split the stock assets evenly between large-cap and mid/small-cap, and split my bonds between the Aggregate index and a junk bond fund, that allocation is all over the place today. Stocks are down but large-caps not so much. Bonds fell at the outset of the plunge, but investment-grade issues have rebounded. The various valuations probably don’t reflect the care I once took.
Here’s where a spreadsheet or an investment company’s allocation tool comes in handy. My 25-percent bond allocation could amount to well over 30% of my portfolio today. I’ll take a look at my allocation values using current balances and shuffle money back and forth to bring each back in line. And I’ll have purchased additional stock fund shares at discount prices that’ll appreciate well as markets recover.
This activity isn’t only make-work, however. As has been noted elsewhere, periodic rebalancing leads to better overall investment performance. My frequency of rebalancing is mostly a function of how much attention I’m willing to give it and how much it’ll cost to execute the trades. Sales within a tax-advantaged retirement account are, of course, without capital gains taxation, so causing taxable events isn’t a consideration. Investment companies generally don’t charge for transfers among funds, though they may restrict re-investment after transferring out of some of them. Many brokers are charging nothing for trading now, so even rebalancing among individual stock shares might be without cost.
Take a quiet afternoon to look through the links above and research how your investment company handles asset transfers. You might be surprised at how easy and cost-free the practice of rebalancing is, and how satisfied having done something beneficial for your financial prospects leaves you.
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