What are you doing with your investment portfolio?
by Mr Credit CardOK – a little off topic from the usual credit card stuff that I like to talk about. Back to basic finances – your investment portfolio.
The global equity markets have got on to the very bad start. Now the question is what do you do? Conventional says you have to have a “long term view”, don’t panic, continue to invest monthly. In the “long run”, every thing will be OK?
Is that really the case? Well, from the peak of the markets in the early 2000s to the lows, the S&P index (a portfolio of highly diversified US stocks) declined 50% in value! I know people who are still trying to recover from that period. For someone in their 20s or 30s, maybe “sticking it out” will work. But what if you are in your 50’s and you cannot afford to take a big hit in your portfolio.
Here’s my view on things and what I intend to do this year.
1. I am reducing my risk. Right now, my portfolio is 80/20 – 80% stocks, 20% bonds. I thought that I have a decent risk tolerance. Turns out that that is not the case. So I am reducing my allocation to equities. How much? Probably down to 50%. So it will probably be a 50/50 portfolio soon.
2. While this may go against the grain of conventional wisdom (stay the course), I see nothing wrong in being conservative in what is looking like the end of the cycle. The worse that could happen is that I under perform the market for one year. But if my views are right, I will be much better off with a less aggressive portfolio.
3. What most mainstream magazines do not mention is that if you outperform in a bear market, you will not need to have fantastic returns to beat inflation when the market turns. But the people who were indexed in the early 2000s had a mountain to climb! This is the concept of risk adjusted return. All professional institutions adjust that portfolio allocations periodically. The idea of asking normal folks like to just adopt a cookie cutter approach to invest – pick an allocation and stick to it through thick or thin is simply ridiculous to me.
4. If you have a “target date fund”, think about reducing your risk to stocks. The problem with these funds is that all they do is to consider your age, but not your risk tolerance. What you are in your 30s but have very low risk tolerance? Should your portfolio be in all stocks? I think not.
But anyway, this is what I’m doing, making some strategic asset allocation decisions. What are you doing with your investments?
January 21st, 2008 at 12:40
don’t-repeat-don’t increase your bond exposure from 20% to 50%-bonds are way overpriced! try cash or-if you’re into some risk-try senior note etfs such as VVR or EFT-high yield at a big discount!
January 28th, 2008 at 02:18
Why do you want to go from 20 – 50% in bonds – I am assuming that is what you mean as you say you are going to go to 50% in equities? That is a big jump. Just a comment out of interest.
TDG
January 28th, 2008 at 05:23
[...] Mr Credit Card from Ask Mr Credit Card presents What are you doing with your investment portfolio?. He is looking to reduce his equity exposure down to 50%, which is a big jump from his current 80%. [...]
January 28th, 2008 at 15:37
I agree with joe, because bonds are higher priced now and your stocks are down. besides, the other reason the market is going down is because people are doing exactly what you are doing. selling, because the times are tough. more conservative people get, the lower the stock value. at this point in the game, the stocks have devalued so much that why would you sell? it is very tough to remember the long term picture when things are going bad in the near term. sort of like not being able to see the end of the tunnel getting out of debt.