Funny, we all know we should buy low and sell high, but the majority of investors do quite the opposite. The last few years have been quite rocky for financial markets, so people have been in a mad rush to pull money out of the stock market and buy “safe” bonds.
The problem with this is that you are selling your stocks on a dip (locking in your losses) and then all those people buying bonds at the same time have driven up bond prices (buying high) and lowered bond yields.
This is the reason that you need to figure out an appropriate asset mix for your age and stick to it without emotion.
You can always use the old rule of taking 100 subtracting your age and using that number as the percent of money you keep in the stock market. So, lets say you were 40. You would subtract 40 from 100 and get a sum of 60. Your portfolio would then be 60% stocks and 40% bonds.
But here is the important part…
You need to re-balance your portfolio (without emotion) when the market swings.
Let’s say the market dropped like it did the last few years and the value of your stocks went down and the value of your bonds went up. You should then sell some of those bonds (sell high) and buy some more stocks (buy low) until you are back at your planned asset mix. In the above example 60% stocks and 40% bonds.
When the stock market is high, you would do the opposite. Take some money off the table by selling some shares and buy some more bonds so that you were back to your 60% 40% asset allocation.
This works the same if you have a mix of mutual funds. That’s why it’s important to know what your mutual funds are invested in.
I invest in a couple of mutual funds through our actors union UBCP. I have one that holds stocks and one that is a mix of bonds. I check the website regularly to check if my asset mix is where I want it to be. If the stock market is crashing, I call up and get them to sell some of my bond mutual fund and buy more of the stock mutual fund. I wouldn’t miss the chance to buy shares when they were on sale!
This step of re-balancing your portfolio is one that a lot of people miss. By rebalancing, you are always buying low and selling high and keeping your emotion out of the decision.
This step can make a big difference in the returns you will see in your investments!