Staying Finanically Calm in Turbulent Markets

The stock and bond markets have been all over the board lately. If you've checked your portfolio, it probably seems to be moving in the wrong direction. Perhaps you're contemplating making some changes to your portfolio, but you're not really sure what to do. Let's look at some options:

Option 1: You could move everything into cash. Cash is always appealing as it stays steady when everything else in your portfolio declines. But you can't earn anything in cash these days (average money market rates are currently below 1%). Option #2: Maybe try bonds? With the decrease in interest rates, bonds have done pretty well lately (there's an inverse relationship between bond prices and interest rates). Option #3: You could consider moving everything into stocks. With the pullback in the market, it may be a good time to buy - buy low, right? So what should you do?

Nothing.

You knew that answer was coming, didn't you? My opinion is you should do nothing, provided you have a proper asset allocation in place! Ah, asset allocation, the term that financial advisors and financial planners are always talking about. It simply refers to having the proper mix of different asset classes, primarily equities (aka stocks), fixed income (aka bonds), and cash. Having the right asset allocation allows you to maximize your returns for a given level of risk with which you are comfortable.

So, what should your asset allocation be? That's really for you and your financial advisor to decide. One rule of thumb that I like: subtract your age from 120, invest that amount in equities and invest the remainder in fixed income and cash (and alternative investments, if appropriate). Using that rule, a 30-year-old would have 90% in equities, a 60-year-old would have 60%, you get the idea.

Seem too aggressive for you? It may be, depending on your risk tolerance. Maybe you've heard that same rule of thumb using 100 instead of 120. I don't think using 100 takes into account our ever-increasing life expectancies, but if you feel more comfortable with it, use it. And remember, a rule of thumb is just a starting point - adjustments should be made for your individual circumstances and risk tolerance.

Of course, within each asset class, you should have a diversified range of investments. Equity exposure should include international markets, large, mid and small cap stocks, and growth and value investments. Fixed income should include a range of maturities and credit ratings.

The most important matter here is to determine (quite possibly with the help of a financial advisor or planner) a proper asset allocation for your investments, put it into place, and then relax. The vast majority of a portfolio's long term return is determined by having the proper allocation. The markets will continue to jump around, but rest assured, your portfolio will soon be moving in the right direction.