We find ourselves living in a finance world right now where a single tweet can move the markets 800-1000 points. If you try to time this type of market, you will likely find yourself going mad given all the volatility. So, what’s the best plan to employ in this type of market uncertainty? Actually, it’s the same strategy you should use in any market; implement a diversified plan, stick with the plan, rebalance periodically, dollar cost average and keep emotions out. There are four core principles to long term investing; diversification, allocation, dollar cost averaging and rebalancing. I will expand on the first two of these in this article and cover the other two in a later column.
Diversification: Having a properly diversified asset mix provides the for the possibility that you could outperform the overall market because not all asset classes move in a correlated way. You should be exposed to many areas of the market in order to take advantage of sectors that may be out of favor now but will be in favor later. For example, you should be exposed to large companies, small companies, growth stocks, value stocks, domestic and international companies. Plus, you should be exposed to equities and bonds. This year alone, intermediate term bonds have returned almost 9% year to date – which is historically a very good return for bonds that usually act as a hedge in a portfolio.
Allocation: Diversification is an important strategy, but how much to invest in each asset class is another. You don’t want to chase returns and change your allocation too often because you’ll want to give time for the plan you enact to work. But how you set up the initial percentage in each sector is important. You do need to consider your risk tolerance, age and timeframe to determine the proper mix with which you’re comfortable and which is appropriate.
In the next article, I will expand on dollar cost averaging and rebalancing. You can always reach out to Flight Line Financial (flightlinefinancial.com) with any questions you may have about any of our articles and services.