Rebalancing Your Mix
There are very few absolute certainties in the investment business. Volatility, however, is one of those certainties. Managing your retirement portfolio and other assets requires a long-term focus to weather inevitable volatile markets over time. That’s particularly important in today’s environment.
A key tenet of successful investing: Don’t kneejerk react.
Strong markets can often drive investors to speculate, or make risky purchases in anticipation of market peaks and higher returns. On the other hand, panic amid market declines may tempt them to sell at low prices and lock in their losses.
Panic-sell or speculate
Panic selling in a bear market is never the wisest course of action. Rabid speculation (and hoping for even higher prices) in a bull market almost never pays off.
Both are the opposite of what a well-structured financial plan would have you do. These kneejerk reactions—decisions based on emotions and gut-feel—have no place in a successful investment strategy.
Plans are better than panic. You should decide on your goals and your tolerance for risk before you ever make your first investment. Ad hoc decisions for an existing plan are rarely the best way to reach your goals and objectives, and that’s true especially in volatile times like today.
That doesn’t mean not to do anything. Regular monitoring of your portfolio’s asset allocation is essential in any market environment.
Monitor and rebalance
As the market moves up and down, the value and proportion of the investments in your portfolio will change. Rebalancing gets you back to your original, long-term target.
Asset allocation is the proportion of different types of investments (stocks, bonds, money markets, etc.) in your portfolio. Your allocation should be based on your risk tolerance, your goals and the amount of time until you need the money.
But the percentage of each type of asset is constantly changing with market fluctuations. Instead of letting the market determine your asset allocation, you may need to rebalance to get back to your long-term target. Here’s what that might look like.
Rebalancing the Mix
Original Allocation: For example, you may have decided to allocate 60% of your portfolio to stocks, 30% to bonds and 10% to cash equivalent investments like money markets.
Out of Balance: If market activity causes the value of your stocks to increase, for example, you'll have a larger percentage invested in stocks, leaving you exposed to more risk than you intended.
Rebalanced: Rebalancing—selling stocks and buying more bonds and money markets—gets you back to your original 60/30/10 mix.
Volatility does present new investment opportunities, especially if you have a high tolerance for risk at this point in your life. This is important: It’s never prudent to invest what you can’t afford to lose.
If you happen to have some extra money on the sidelines and you’re comfortable with potentially risky investments, you could consider bottom-fishing with stocks and bonds.
Bottom-fish, or buy low
Bottom-fishing is a risky move if there turns out to be a reason the investments were priced so low. But it can work in your favor if price was down temporarily and the value increases after your purchase.
Buying low—or bottom-fishing—is when you seek investments that you believe are currently undervalued and may increase in value.
Seeking new opportunities (and accepting the accompanying risk) could be appropriate for some investors. But for most with retirement and other longer-term savings plans, it may be best to stay put and let your investment strategy do what it was designed to do.
Markets can change quickly, and it’s important to be comfortable with your plan and your emotions in the face of uncertainty. With stocks at record highs, your stock allocation may be significantly above your intended target. Now may be a good time to rebalance back to your original plan.
We can help you determine what's appropriate for your needs, so you can be ready for what's ahead.
Rebalancing allows you to keep your asset allocation in line with your goals. It does not guarantee investment returns and does not eliminate risk.
Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.
The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.