In real estate there are three words to live by: …..location….location…..location.
When investing there are three words to live by: …..rebalance…..rebalance…..rebalance.
Last week marked the longest bull market in history as measured by the S&P 500 index. The U.S. economy remains quite strong. The market has risen over 320% since its low compared to the 1990s bull market that went up 417% before the tech bubble burst.
With the market going so well you might question, why re-balance? It’s very easy to understand re-balancing your investments when things aren’t going so well. But much harder to sell those winners, reduce your S & P 500 holdings and buy those out of favor assets when the market is doing well and the economy is so strong.
It’s important to remember that investment strategies are based on a number of interconnected factors or variables. The most important is of course, your goals. Are you looking for long term growth? Are you retired and just need to keep the income flowing? Are you just a few years away from retirement and the last thing you want to happen is see your retirement shrink because of a market downturn a month or six months before you want to retire?
Next, is your risk tolerance. As you know we measure risk in three ways. How much risk you want to take? How much risk can you tolerant? How much risk do you need to take?
Finally, what does your retirement plan look like? Do you have more than enough, just enough or are you short of what you need to retire?
The rational investor would take all these into consideration and then… re-balance.
But fear and greed come creeping into the picture.
Fear: will I lose it all?
Greed: will I miss out?
I have a secret to share…decisions based on fear and greed have never helped anyone achieve their long term goals.
Rebalancing on a regular basis is the key to realizing long term positive investment results and also protecting the gains you have already realized.
Your investment strategy was created based on your goals, your risk tolerance and your financial plan. So, unless your goals, risk tolerance or overall plan have changed why should your investment strategy change? But that is exactly what a long bull market does. It changes your asset allocation and changes your investment strategy.
So take charge of your future and re-balance.