I am actually surprised that I am absolutely sane and not a single bit bothered during this equity meltdown recently. Why? I attribute this to a couple of things.
1. I Know My Risk Profile – I hired an advisor and did a series of questionaires to find my risk my risk profile. I found out that I am not a super aggressive investors. I was a moderate investor.
2. My portfolio allocation is consistent with my risk profile – Because I knew my risk profile, my asset allocation is aligned with my risk profile. I have about 60% invested in stocks, 35% in bonds and 5% in cash (emergency funds and everyday funds).
3. I am diversified – My stock portfolio has large, mid, small cap and international stocks. It has both growth and value components. And yes, I have reits too. The bond portfolio has government bonds, mortgages, corporate bonds, high yield bonds and international bonds.
4. My portfolio is automatically rebalanced – My money is invested in a managed account. The asset allocation in my portfolio is pretty much fixed and it rebalanced automatically. Therefore, there is no need for any decision to now? or get out of the market? I just simply put money in every month.
There are other things that help me keep my sanity as well.
5. I do not have any credit card debt – It really feels good not to have any credit card debt. I plan to stay debt free.
6. I have bought a house I can afford – We bought our house 2 years ago probably at the top of the market. But we can afford the monthly payments and we do not intend to sell it. We took a boring 30 year conventional loan.
7. My income source does not really depend on the stock market – No, I am no mortgage broker or real estate agent (but it will not be revealed). But it helps that it has nothing to do with the housing market. I also have a couple of other income streams which is really helpful.
Having said all this, things were never like this not so long ago. I used to invested on my own. I bought my own stocks. I did my own research. But I underformed during the early 2000s. Worst of all, I realized that if I was really that good, I should be owning a hedge fund and making loads of money (hey – some hedge fund managers take home 9 figures a year). I realize that if I’m not earning top dollars investing, then I should really leave it to the people who are good and making that much themselves!
FInal thoughts – Knowing your risk profile, having an asset allocation that is consistent with your risk profile and having automatic rebalancing will really take the emotions away when markets are volatile. Here are some post from the bloggesphere about the recent market moves and their asset allocation. Some have got it right, while I feel a couple still have a way to go.
For example, Free Money Finance writes a post about articles telling why it’s a great time to invest now. Well, as I (and many) have said, if you have a plan, then market timing should never be an issue. Lazy Man and Money writes a short blurp on why it is the right time to stocks. Frankly speaking, trying to time the market is just a waste of time IMO.
The simple dollar advised a reader to get out of an investment when you are nervous. Once again, the reason this situation arises is because the investor did not know the reason for the investment and the portfolio is not automatically rebalanced. Rather than giving that advice, i would have asked the reader why she got in the investment in the first place? Because if you got into an investment (not trade) for the right reason, this situation should have never arosed.
Jim from bargaineering liquidated his 2050 retirement fund. He says the funds is not long term nor was he panicking. But then he went on to talk about how the climate is awful for investing right now!?
There are some pf bloggers who have laid out how they have their asset allocation done (which is great). SVB from The Digerati Life highlighted recently how she rebalanced her portfolio. A few pf bloggers have also revealed their asset allocation to SVB recently. She posted them on this post about how some pf bloggers are invested. I think these bloggers get it and have a sound asset allocation strategy.