Certified financial planner Wes Moss provides personal finance advice and accessible investment strategies. His guest post appears here Monday mornings.
It turns out all that glitters might not be gold. As stocks tumbled in recent weeks, gold has skyrocketed to new highs. But last week the super-hyped yellow stuff fell by more than 10 percent in just three days.
No surprise after a relentless run up, as nearly every market trend that skyrockets without interruption eventually falls back to earth, especially those not powered by earnings –- things like commodities, spec condos and Internet companies that haven’t generated a profit. (Remember Pets.com?)
So what’s the right strategy for navigating the kind of turmoil we’ve seen in the market? The first critical step is to keep your head. Don’t panic and sell otherwise solid stocks that have been caught in a general down draft. Step two: take advantage of the situation and snap up more shares of quality companies while they are trading at bargain prices.
Let me guess. You think this is a great idea, but you don’t have any cash to take advantage of it. Yes, you do! If you are diversified in your investment holdings, you are actually in a better position than if you had been sitting on a pile of cash for a couple of years. You have assets that have actually gone up in value. You can sell some of those current assets at high prices and buy others at low prices. Buy low, sell high. Sound familiar?
Here’s an example. Since April 1, the Vanguard Total Bond Market Index fund has returned more than 5 percent and gold is up 23 percent — even after last week’s 10 percent slide. If you hold both of those assets, now might be the time to take some of those gains off the table and buy a high-quality dividend stock index fund yielding nearly 3.5 percent — something like the Standard and Poor’s Dividend index (SDY).
This is called rebalancing, and it takes the timeless wisdom of “buy and hold” to another level.
For example: Let’s say you have tried to keep your 401(k) allocation at 70 percent stock, 30 percent bonds, and today the balance has shifted closer to a 63 percent stock and 37 percent bonds. With the stock market down and bond market up, now is the time not just to hold onto your stock position, but to add to it with the money coming from the bonds that have gone up in value.
While re-balancing is an excellent way to “not let a good crisis go to waste,” the practice should be an ongoing part of your investment regimen. If you don’t rebalance on a regular, proactive basis and simply allow the mutual funds in your 401(k) to determine your asset allocation (based on their gains or losses) you lose control over how much risk and variation you are going to experience. But keep your assets balanced and your portfolio’s long-run performance will be, well, as good as gold.
– By Wes Moss, for Atlanta Bargain Hunter