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Up to You

Ross Menke  |  March 6, 2019

INDEX FUND investing seems to grow more popular by the day—for good reason: For very little in investment costs, you can get a diversified basket of stocks, a return that matches the targeted benchmark and a tiny annual tax bill.

But now that you have yourself such a fine financial vehicle, the responsibility to be a good investor lies in your hands. Or should I say, with your emotions? Even the best investments suffer downturns and spikes in volatility.

You need to put safeguards in place, so you protect yourself from yourself—from making panicky decisions during periods of market mayhem. How do you do that? You need a plan:

1. Draw up an investment policy statement. It’s crucial to have a written document that stipulates your investment process, so there’s no debate about how to invest your money at any given time. Your investment policy statement—or IPS—should spell out the target asset allocation and long-term objective for your various investments. At times of market volatility, you can refer back to your investment policy statement to confirm your next investment moves.

2. Settle on a rebalancing strategy. When should you rebalance your portfolio back to the target allocation specified in your IPS? There are two possible strategies: time-based and percentage-based.

A time-based approach means you rebalance your portfolio every year or every six months, regardless of how it’s allocated at that point in time. You get in the routine of rebalancing on a specific date—your birthday or Jan. 1, for example.

Meanwhile, a percentage-based rebalancing process requires ongoing monitoring. You only rebalance when a specific asset has drifted from its target percentage by, say, 10% or 20%. Let’s say your target percentage for U.S. stocks is 50%. You might rebalance when U.S. stocks fall to 40% of your portfolio or climb to 60%.

3. Set criteria for new investments. As you become more financially successful, you’ll be presented with more and more investment opportunities. But as the value of your portfolio grows, you may also feel more stress from daily price fluctuations, because the dollars involved can be frighteningly large.

The key to handling all this is to follow a set process for evaluating new investment options, so you don’t make snap decisions. That process should consider things like investment costs, risk and whether the new investment fits with your current holdings. One advantage: When a friend, family member or financial salesperson presents you with a can’t-miss investment opportunity, you’ll have a ready excuse for not taking the bait.

Ross Menke is a certified financial planner and the founder of Lyndale Financial, a fee-only financial planning firm in Nashville, Tennessee. He strives to provide clear and concise advice, so his clients can achieve their life goals. Ross’s previous blogs include No Money DownCut It Out and Too Familiar. Follow Ross on Twitter @RossVMenke.

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