When the stock market hits a rough patch, or when it is due for a correction, you might be thinking “Should I get out of the stock market?” and “Where should I put my money?” The answer is it depends. Every year, you should be evaluating your needs and adjust your investment strategy to fit those needs. Personally, I still have two more decades to go, so I am holding steady and continuing to invest for the long-term.
Steps to Evaluate Your Investment Strategy
1. Risk Tolerance Level
Have you taken one of those risk tolerance tests? Did you get a rating like “aggressive investor” or “very aggressive investor”? May be it is time to take another test to see if you still feel the same way you did back when you first took one. Your life situation and financial priorities could have changed — e.g., you’re getting married, saving money to buy a house, having a child, going back to school, etc.
Understanding your current risk tolerance level and where you stand is a good place to start.
2. Investment Time Horizon
Even if you are still optimistic and your risk tolerance level still says you are an “aggressive investor,” you should determine if your time investment horizon changed from the last time you checked. As you get closer to your retirement age, you should consider shifting more of your investment portfolio away form equities toward investments that focus more on generating income.
3. Asset Allocation
Does your asset allocation align with your risk tolerance level and investment time horizon? If you have been religious about rebalancing your portfolio, but haven’t changed the allocation for a while, this may be a good time to take a good look at it.
Here is an Asset Allocation Calculators from CNNMoney.com to help you with your allocation. Does your current investment mix in line with the ideal asset allocation? As you can see, same an investor with the exact same Risk Tolerance, but different Investment Time Horizon has very different recommended allocation.
|3-5 Years Time Horizon||20 Years Time Horizon|
Does your investment consists mainly of individual stocks? If it does, I recommend that you read Wise Investing Made Simple: Larry Swedroe’s Tales to Enrich Your Future by Larry Swedroe. Larry believes that the best investment strategy is to be a disciplined, long-term, buy-and-hold investor that utilizes globally diversified portfolio of low-cost, no-load, and passively managed funds and ETFs. I also believe in this strategy.
In short, invest in funds and ETFs instead of individual stocks
Now let’s take it a step beyond the typical diversification when we think about investment — i.e., stock vs. bond, large-cap vs. small-cap, domestic vs. international, value vs. growth, etc. Do you have other types of investment that are generating alternative income, or appreciating in value?
- Business investment
- Real estate investment
- Precious metal and gems
- Debt investment
Do you believe your investment portfolio is diversified?
Additional Investment Tactics
You shouldn’t let emotion drive your actions. The worse thing you can do is check the stock market daily and react to every ups and downs. However, there are practical investment tactics that you could consider:
- Determine your ideal asset allocation and adjust your portfolio toward it. There are two ways to do this:
- You can slowly adjust by adding new money toward the under-represented investment classes, or
- You can rebalance existing investment to immediately achieve the ideal allocation.
- Sell losing stocks and mutual funds to capture losses for tax purpose.
- Switch from mutual funds to low-expense exchange-traded funds (ETFs). There are two reasons why you may want to do this:
- When money is exiting the fund, the fund manager is forced to sell the underlying stocks. When this happens, the fund could generate capital gains even while it is declining in value. With volatile stock market, I suspect that a lot of funds will lose value and generate large capital gains distribution, resulting in mutual fund double whammy losses.
- Saving even as little as 0.5% on average expenses ratio can have a huge impact on investment performance. For example: $10,000 growing at 10% with 1% expense ratio will grow to $129,000 in 30 years, but it would have grown to $150,000 at 0.5% expense ratio!
Stay in stock market or get out? It is a tough decision. I know watching your hard earned money going down the drain is hard. However, it’s better to act with reason, than to react with emotion. Always have an investment strategy and stick to it!
Pinyo is the owner of Moolanomy Personal Finance and a Realtor® licensed in Virginia and Maryland. Over the past 20 years, Pinyo has enjoyed a diverse career as an investor, entrepreneur, business executive, educator, financial literacy author, and Realtor®.