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THE CORONAVIRUS IS prompting people to behave irrationally. They’re hoarding food, toilet paper and other goods. They’re risking their health—and that of those they know—by failing to limit their physical contact with others.
This irrationality has spilled over into the stock market. More than 30% of the U.S. market’s total value has been wiped out. It’s hard to argue that this is justified. The businesses represented by these stocks may be hit with short-term disruptions and a temporary reduction in profits. But nearly all will remain in business and thrive in the future.
The world is not coming to an end. The world’s population has faced bad times before—some far worse than the coronavirus—and yet the world continues to turn. This is not to diminish the hardship that will be suffered by many people, who will lose income due to temporary business closures and slowdowns, nor am I ignoring the tragic deaths of those who have and will succumb to COVID-19. But with time, we will conquer this disease and move forward.
While we’re waiting for good news on the coronavirus vaccine front, there’s already good news for investors. What’s that? There’s a vaccine available for every investment portfolio. It won’t eliminate all symptoms, but it can lessen the degree to which you suffer emotional and financial stress during uncertain times. The vaccine comes in a two-part injection.
The first shot is asset allocation. Asset allocation is the conscious effort to align your investments with a level of risk that you’re able, willing and should assume. That means selecting diversified investments so that you have an overall portfolio risk level that allows you to sleep at night and not worry about your finances.
There are many ways to define risk, but let’s consider one measure: standard deviation. Standard deviation is the deviation from the “mean” return over a specified timeframe. The higher the standard deviation, the greater the risk of inconsistent returns from year to year. Investors like consistency and predictability. In its absence, investors themselves become irrational and unpredictable.
When you invest heavily in the stock market, you get a portfolio with a high standard deviation—and occasional results like we’ve seen over the past month. Ask yourself this question and try to answer honestly: “Can you emotionally manage such declines?” If not, what maximum decline can you emotionally and financially manage? How you answer these questions will define your investment portfolio’s asset allocation vaccine.
This is an oversimplification, but a portfolio made up of 50% stocks and 50% in cash and bonds will basically have half the risk of a 100% stock portfolio. Sure, with a more conservative mix, you’ll likely earn less over the long run, but you will sleep better at night. What’s that worth to you? Set your asset allocation so you have the level of emotional comfort and stability necessary to stay invested through thick and thin.
Rebalancing is the second vaccine shot for your investment portfolio. Rebalancing is the conscious, deliberate and regular effort to realign your asset allocation back to your ideal state. It requires periodically harvesting some gains and adding the proceeds to asset classes that have not fared so well. Usually, rebalancing should occur annually or after times of extreme market action, like we’re experiencing today. It allows you to do something without harming your overall investment portfolio. Rebalancing provides the intellectual and emotional discipline we need to keep us moving in the right direction.
Assess your investment portfolio today. What changes should you make? A two-injection vaccine is available for your investment portfolio. Use it now.
After 30 years in corporate sales, Ray Giese, CFP, CCSP, MS, launched an encore career with his coaching practice, Career & Financial Pathways LLC. His goal is to help people align their purpose, passions and paycheck so they achieve financial freedom, while realizing greater personal and career satisfaction.
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The problem with AAs are the natural tensions that lie between surviving a big market drop and investing in enough equities to fund your retirement. I believe that the odds are with me, and the approach I’m taking will payoff in the long run, but the market promises nothing to anyone.
Today I started on step #2. Half my rebalancing is complete, in another month I’ll do the other half.
The uncertainty is the really difficult part. As a 20,30 or 40 year old I had virtually no fear. Unless you have enough savings to retire at 50, though, you are going to be heavily dependent on the market for that final boost as you prepare for retirement, and, not to repeat myself…
The one thing I can do is try to choose the path most associated with solid long term outcomes.
Best of luck to everyone out there.