A Litmus Test…Is Your Asset Allocation Right?

Posted on June 4, 2010 at 3:28 PM PST by

Like a volcano, markets go through phases: they do very little and then suddenly they spit fiery lava. With new problems being introduced each day, be it Greek debt or the survival of the Euro, the markets are trying to figure out what stuff is worth. Volatility is up. And the “forecasters” are out in droves predicting which way the markets will blow.

One new MarketRiders member asked the other day, why we recommended VGK, an index made up of the largest 482 stocks in 16 European countries when “everyone knows” that Europe is in trouble. VGK is down 18% this year, while the S&P is down 2%.

First, think of the thousands of investors all around the world, who deeply understand the economic circumstances of every country in Europe, focused every second on figuring out what every one of those 482 stocks are worth. Is your opinion on VGK’s price better than theirs? Second, VGK belongs in a globally diversified portfolio, because we care about the long term. Europe will recover. In 10 years, VGK’s price today will likely look cheap because those 482 companies will be more valuable.

Last summer when gold was $900 an ounce, a member declined to include it in his recommended portfolio because in his opinion “it was over valued.” Today its hitting $1200.

It’s during times like these, that you can really appreciate the calming logic of the MarketRiders investment methodology. Trying to time and guess the market’s direction is futile for most mortals and investment professionals. MarketRiders is based upon the idea that since we never know how an asset class will perform — we own them all at a very low cost, in proportion to our risk tolerance and we rebalance them as the markets shift.

Sounds easy to “buy low and sell high” doesn’t it? When you receive a rebalancing alert to buy VGK, are you willing to buy more Europe? We certainly hope so.

Is your asset allocation right? This market provides you with a litmus test. If you are feeling panic, then perhaps your stomach lining isn’t strong enough for amount of equities in your portfolio. It may be time to consider whether you should increase your exposure to bonds and TIPs. Our software makes it easy to do this by clicking on “Change Targets % or ETFs” on the dashboard.

Markets like these test you. Stay the course and take a gut check. With MarketRiders, your fees are rock bottom. Follow your rebalancing alerts to take advantage of the market’s volatility, and if your allocation is right, you’ll be able to keep your mind off the stock market.

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