Your Market Jitters Might Mean You Should Rebalance

Feeling edgy about the stock market? Don’t be embarrassed. It’s a perfectly normal feeling.

Any time things go well it’s understandable that you might take a step back and ask, “What could go wrong?”

Say your favorite NFL team is up by 14 in the third quarter. You might feel like things are well in hand, but there’s a sneaky little voice in the back of your mind that asks, “What if?”

When things go really well, as they have for the stock market lately, that feeling is compounded by the fact that most of us have no idea why stocks go up or down. At least with football you can analyze strengths and weaknesses and game out a fantasy team if you like.

If you own just one or two stocks, it might be possible to educate yourself on the reasons those investments have risen in value. Perhaps you work in the same industry or even at the company itself.

(That, by the way, is a huge concentration risk, but a different problem altogether.)

If you own a stock mutual fund or a broad-market index fund, there’s just no telling. Hundreds of stocks pushing through yearly highs day after day is impossible to analyze.

You end up shrugging and saying, “Well, I guess the economy is okay!”

If you’ve been an investor for a while, you know the goal is to buy low and sell high. If stocks keep making new highs upon new highs, there might seem to be no obvious point at which to sell and take those gains.

What if you sell and they go even higher? Would you regret taking action?

What if you do stay in and they fall dramatically? Would you feel worse?

If you were the coach of that NFL team, you could sub in a star player at the right moment and maybe clinch the game. That might work, or you might make the wrong call and blow your comfortable lead.

Here’s where you have an advantage over the professional coaches. You can make what would effectively be half your decision at a time and feel perfectly fine about whatever happens next.

It’s called rebalancing, and it works like this: You have decided, before investing, that your tolerance for market volatility is only so great.

For instance, you might not mind weekly or monthly swings in the single digits, but a daily movement in the double digits would cause you to lose sleep.

In that case you choose a portfolio that’s a mix of stocks and bonds, say 60/40, meaning 60% of your investment cash is in stocks and 40% is in bonds.

If you’re younger and have more years ahead of you to invest, that mix might be 80/20. If you’re only a few years away from retirement you might prefer 50/50.

Gentle pace

A portfolio that owns a mix of stocks and bonds will still enjoy the upside of increasing stock values, but at a more gentle pace. That might not sound ideal in a rising market, but it also means that sharp market reversals will be less damaging.

The way you make half a decision is to periodically review your portfolio. If you find that stocks have taken off and your mix is now something like 65/35, then rebalance.

Sell off 5% of the stocks and use the cash to buy bonds. You get to sell high and buy low. If bonds shoot higher and stocks stagnate — now your portfolio is 58/42 — then sell bonds and buy stocks.

Again, you’ve sold high and bought low.

The bottom line is that you enjoy most of the positives while limiting the negative impacts of volatility on your frame of mind. You get less of the jitters and a smoother ride over the long term toward your financial goals.

MarketRiders, Inc. is a registered investment adviser.  Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.  Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.