The Alternative Press

In the past year, the northeastern United States had a crippling snowstorm, an earthquake, a hurricane, and yet another crippling snowstorm.  Did you hide in a corner of your basement with a year’s supply of canned goods and announce you weren’t going outside again until the weather got back to normal?  No—you dealt with it, realizing that volatile weather patterns seem to be here to stay. 

So why is a planner talking about the weather?  Well, just as the weather has gotten more volatile in recent years, so have the markets.  And just as hiding from the weather hampers your daily life, so hiding from the markets hampers your financial future.  Instead, accept reality and take steps to reach your goals in light of that volatility.

Three basic steps will help you weather financial volatility.  They are asset allocation, diversification, and rebalancing.  However, as with so many aspects of life—think losing weight and staying healthy, or being a good parent—knowing what to do is easy.  Doing it well is incredibly hard.  Understanding the steps and learning a few hints can help you reach your goals, regardless of short term market swings.

Asset Allocation is selecting a mix of equities, fixed income, and cash that will get you to your financial goals without exposing you to more volatility than you must accept.  In the broadest terms, equities are for growth, fixed income is to provide regular income and dampen volatility, and cash is for liquidity, to meet current needs to take advantage of opportunities.

For most investors, there is no single perfect asset allocation. There is a range that will work, and the key is to express an allocation—in percentages—that will work.  That allocation should change only if there are changes in your life—a new child or a job change, for instance—not just because the stock market is doing poorly—or well. 

Diversification is a fancy way of saying don’t put all your eggs in one basket.  You need to own enough different positions—in both stocks and bonds—so that if one goes south, you aren’t wiped out.  Too often, investors end up owning too much of their employer’s stock.  If that company fails, they risk not only their jobs but their nest eggs. 

It’s not enough to own 30 different stocks.  Your stocks—and your bonds—should be diversified across industrial sectors of the economy.  Owning 30 different bank stocks wouldn’t have protected you in 2008, but owning three different stocks in ten different sectors would have helped considerably.  You’d have fared even better if you also owned Treasury bonds.

Diversification works because not all parts of the economy march in lockstep.  No one can truly predict what will happen in the near term, and diversification means that some of your portfolio always stands to benefit.

Mutual funds are a good choice for those just starting out, because they provide instant diversification.  For those with more to invest, individual stocks and bonds can provide more customized—and tax sensitive—results at a lower cost.

Rebalancing is the third leg of the tripod, and the hardest to do.  Periodically, look at every position in your portfolio.  Chances are, as one part of the market moves up and another moves down, you’ve drifted from your stated asset allocation.  To rebalance, move back to your stated allocation and diversified positions by trimming back the winners and buying more of the losers.

To rebalance successfully, you should do it on a regular schedule.  On a fixed date, perhaps the first day of the calendar quarter, cast a gimlet eye on your portfolio, and sell those winners.  You might also consider rebalancing whenever market moves shift your stated asset allocation more than five percent off target.

Note:  Claire E. Toth, JD, MLT, CFP™, is Vice President of Point View Wealth Management, Inc., a registered investment advisor at 382 Springfield Ave., Summit. The full-length version of this article is available at:  www.ptview.com.