Keep Your Eye on the Prize

Valerie Johnson, CFP ®
Director of Wealth Management, Kolb+Co. Financial Advisers, LLC   email | bio
February 2009

Looking at the value of your investment portfolio in today's market can be gut- wrenching. With the market in turmoil, you may be tempted to jump ship on your stocks or equity mutual funds for calmer waters in money market funds, Certificates of Deposits or putting it under your mattress.

But now is the time for steady nerves.

It is important to keep in mind that investing is usually a long term proposition, even into your retirement years. Assuming that your current investment strategy was appropriately determined based on your specific financial objectives, time frames and risk tolerances, your overall portfolio target allocation need not be adjusted unless one or more of those determining factors has changed or you have an immediate income need.

Your appropriate portfolio allocation target is the key concept.

Trading the long-term potential of stocks for the short-term calm of cash and bonds brings its own risks. Inflation will erode the low rates of return in treasuries and cash equivalents, so over longer periods of time, you actually lose money after cost of living increases and taxes. Also, abstaining from the market to protect on the downside prevents you from enjoying the returns on the upside. Trying to time the market swings can be costly; buy low and sell high is much easier said than done!

Understandably, it's difficult to be rational when your portfolio loses 20 percent in a month and the media is giving constant updates on the "crisis" and the "panic." Unpredictable market swings may have you feeling uneasy and out of control, but it is the destination, not the journey that matters in the end. The S&P 500 has gone through seven bear markets in the last 40 years and had you invested in stocks in1968 and let it ride through October 2008- your money would have grown forty-fold.

It may be the time to re-balance your portfolio.

That being said, not everyone has a forty year time horizon or the risk tolerance for a 100 percent stock allocation. That is why most portfolios are diversified between different asset classes. Due to the recent market fluctuations, it may be the time to re-balance your portfolio. Redistribute between stocks, bonds and cash positions to bring you back to your recommended asset mix. For example, if your target allocation is 60 percent stocks and 40 percent bonds, but with market conditions you have fallen to 45 percent stocks in your portfolio, you should consider repositioning assets from bonds to stocks to get back into balance with your target.

However, before you re-balance, ask yourself if your old allocation remains appropriate and if you are still comfortable with it. A re-balancing strategy may not apply if the recent market volatility has caused you to rethink your risk tolerance, or if your time frame to withdraw from those assets has gotten shorter. If you are in your 50s and 60s and are in or close to retirement, with shrinking home equity, it may not be prudent to reevaluate your overall financial plan.

Ironically, in many situations doing nothing right now might not be such a bad response, unless an investor is young. In theory, the market downturn could work to the advantage of those 45 and younger with decades to invest, if they buy stocks now when they are on sale.

If you need a buffer between your fear of making a wrong move and your wealth, contact Valerie Johnson (262/754-9400). We can help you focus on what is most important, your objectives and the ultimate reward of investing --financial independence.