After years of steady climbing the stock market is rocking investors with daily swings in the hundreds of points. You might feel like it’s time to sell stocks now.
It’s enough to make the long-term investor reach for an antacid. But if you ask any seasoned financial professional what to do, you’ll likely hear, “Don’t sell now.”
And your adviser is right. Actions taken in the heat of stock market volatility almost never turn out well.
A stock you feel has run its course might correct with the market and go on to new highs. One you want to keep could founder and lose more still.
Guessing right the direction of one share is close to impossible. So don’t bother.
In fact, there is a way to enjoy the benefits of a rising market, even if it falls back from time to time.
It doesn’t take any stock-picking expertise. In fact, the less you make your decisions about one stock or another, the better off you’ll be in the long run.
That simple idea is rebalancing.
A lot of investors yawn at words like “rebalance” but consider this: Timely rebalancing is just selling high and buying low.
If you invest in individual stocks, this might be hard to do. When is a high-flying tech stock “high.” When is a startup IPO “low” and ripe to purchase?
Difficult questions. But if you buy your investments through index funds, it all gets much easier.
All you have to do is decide what percent of your portfolio should be in stocks, and what percent in bonds. (In this simple example, we assume you own just two funds. More complex portfolios require more attention but the basic idea remains.)
If you say 60% stocks and 40% bonds, fine. Buy a broad, low-cost index fund of stocks, such as the S&P 500 Index, and a similar index fund of bonds.
Then just wait. Twice a year, look into your portfolio. Look at the dollar value of your stocks and the dollar value of your bonds.
It it still 60% and 40%? If so, do nothing.
Chances are, however, that your stock fund has grown faster than your bond fund. It might be more like 68% vs. 32%.
So you sell high. Sell just enough of the stock fund to get it back to 60% of your total portfolio balance.
Use the cash to buy the bond fund, pushing it back to 40%.
In time, you’ll experience rocky stock markets. Your bond fund might outperform your stocks in any given stretch.
If so, rather than sell stocks now, cash out of some of that bond holding instead.
Use the money to, you guessed it, buy stocks. They’re relatively low.
By doing this periodically and with discipline, you actually add return without adding risk to your portfolio — investing nirvana.
And you don’t have to know a thing about the underlying investments, stocks or bonds.
All you have to do us rebalance and move on, secure in the knowledge that you’ve take the right steps, no matter what’s going on in the markets today, tomorrow or next year.
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.