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What do you do when Wall Street holds a sale?
The Wealth Conservatory is a fee-only wealth consulting firm with offices in Lebanon NH, Bedford NH, Livermore CA, and Springfield MO.
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30 Jan What do you do when Wall Street holds a sale?

Posted at 08:53h in Investments by

As we all know, financial markets (for stocks, bonds, precious metals, everything) rise and fall – sometimes dramatically, as we witnessed in 2009.  That is called ‘volatility.’  It can be unnerving, but it also presents a valuable opportunity for long-term savers and investors.

A visual depiction of stock market values over many decades (termed a ‘mountain chart’ by professionals) reveals a relentless rise in values over time.  Yes, there have been some significant dips; but, they have historically all recovered and led to new all-time highs.

So, what do we want to do during those dips, when Wall Street effectively holds a sale on securities?  The prudent long-term answer is to buy.  The emotional reaction is, of course, to sell.  The opposite occurs near peaks.  Even though we cannot predict what will be a peak, it makes sense to do a little selling as the markets rise, just to keep our net exposure, or allocation, on target with our risk and return objectives.  Emotionally, a rising market appears attractive for additional investment.

The discipline of adding to positions when they are on sale, and lightening up on them as profit opportunities present themselves (buy low/sell high) is referred to as ‘rebalancing’ one’s portfolio.  It is a discipline that forces us to exploit the opportunity for enhanced long-term returns as the markets present them.

The next time the market rises, go ahead and cheer with the rest of the crowd – and take a little profit to get back to your target asset allocation.  And, the next the market dips materially, cheer with us – and buy a little more while it is on sale.

Oh, and by the way, if you don’t think you have any money to buy a little more on dips, look around your broadly diversified portfolio.  I’ll bet you something in there did not go down.  Rebalancing will force you to take a little from there to bring your overall asset allocation strategy back on target.

As always, the Wealth Conservatory team is here to discuss these opportunities with you and we welcome your call.

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