Burett How to Control Excess Volatility in Your Portfolio
The conventional wisdom is that the younger you are, the more stock market risk you can take. The simple thinking behind this is that a younger person has many more years in which to recover from a 揹estructive storm?and reap the ultimate benefit of holding stocks in the long term. Clearly, a worker close to retirement could not easily recover from such a destruction of value because there isn抰 enough time. By the same token, retired people may have the lowest tolerance for stock market risk since they may be living on a fixed income and can抰 afford any loss of value.
This painfully obvious problem with the traditional approach has fueled development of a more active investment style that seeks to avoid most of the ravages of destructive storms, when they arrive. The active approach can reduce the risk involved with holding stocks; and can allow the average investor to tolerate a higher percentage in their portfolio. So if the 搕raditional?allocation approach says you can only tolerate 40% in stocks, the 揳ctive?approach might allow you to tolerate up to 75% when the market is bullish.
Deciding upon the right portfolio mix for your particular situation is a delicate question and should involve careful consideration of a broad range of factors Patek Philippe Replica. There are a number of important caveats you should understand before entering into a traditional asset allocation exercise with a broker or financial planner.
Online Asset Allocation Tools are ?well ?揅anned? Many brokers and mutual fund companies include an online tool on their websites that you can use to generate recommended asset allocation percentages for your portfolio. These tools can be helpful as you consider the different factors in your situation and what impact each should have on your allocation decision. But many of these online tools are too simplified and may not be able to take into account certain critical factors in your own unique situation. Suffice it to say that these canned tools don抰 really substitute for an in-person interview with a good financial planner or advisor.
The drawback of the traditional asset allocation technique is its reliance on a 揵uy and hold?philosophy. The method is based upon the belief that you can抰 successfully time the markets ?that you just have to sit tight and collect your average historical return of about 7% per year on stocks over the long run. In fact, it can be the very long term. Studies show that in many previous years, going back 100 years, investors have had to wait 20 to 40 years to actually achieve that average long-term market return.
The right portfolio mix for you will be a reflection of very individual circumstances. The right mix should be consistent with your 搑isk tolerance? If you could not weather a short-term portfolio loss of more than 25%, then you may not want stocks to represent any more than about 50% of your portfolio (if you assume that the next destructive storm wouldn抰 be worse than a 40% to 50% drop in the market) T8 LED Tube. In that event, a 50% loss in your stock market holdings would translate into a 25% hit to your overall portfolio (assuming the other half is invested in cash or money market funds).
But it takes timing of the markets to be successful. While the timing success of market 揼urus?has long been suspect, the reputation of market timing has grown steadily among sophisticated investors given the increasing reliability of computerized models that analyze a host of quantitative factors about the market.
If you had invested in the stock market in 1964, you would have bought in just before one of those destructive storms rolled in. This storm was a monster and you would have waited 17 years before breaking even on your investment ?actually about 27 years if you take the effects of inflation into account.
Needed: Years of Patience
?However, young people just entering the work force may have good reasons to avoid taking much risk in the early years. Just like someone approaching retirement, young workers likely have several important, near-term objectives for using their savings: (1) buying a home, (2) paying back school loans and (3) starting a family. Too much portfolio risk could be counter-productive.
?Then there is a newer, more active style of portfolio management that involves adjusting the allocations for the different asset types as market conditions change. The active style is generally referred to as 揹ynamic asset allocation?or 搕actical asset allocation?
Stocks are the 揼rowth engine.? So you want as much stock market exposure as you can handle in the form of mutual funds, index funds and diversified groupings of individual stocks. But you have to balance stocks?higher growth potential against the risk of a 揹estructive storm?because the stock market has historically taken dives of as much as 40%, 50% and even 90% during bear markets.
How do you design a portfolio mix in the traditional way that will maximize returns yet not expose you to more risk than you can handle? That抯 the $64,000 question.
At the other end of the age scale, retired people may need to introduce more stock market exposure into their portfolios to have some growth potential that can offset rising expenses during their increasingly longer lifetimes. The rising costs of medical care, combined with the general rate of inflation can do serious damage to a fixed income over 15, 20 or 30 years ?and that抯 how long many retirees can expect to live Replica Watch.
?Since traditional asset allocation techniques are based upon a 揵uy and hold?approach, the trick is to decide what percentage of your portfolio should be in stocks so you get some of that growth engine working for you, but not so much that you can抰 weather a destructive storm if it were to hit.
The point of these computer models is to identify longer-term market trends and invest in them until the trend falls apart. A strategy for actively changing the asset allocation of a portfolio can be driven by this kind of market timing analysis. For example, such a dynamic strategy would have had you heavily invested in stocks during most of the 1990抯 while the bull market was raging. Then it would have moved your portfolio out of stocks and into something else in 2000 after the market peaked and a new stock market downtrend became evident ?thereby avoiding most of the damage suffered by the average buy and hold investor.
Stepping Aside to Avoid the Destructive Storms
Active portfolio management is now accessible to the average small investor because there are a growing number of individual investment advisors, services and that employ these techniques with success Cheap Watches. Some of these services can even be used to help you manage a 401k portfolio. Now you can weather the destructive storms by moving your portfolio out of their way and sitting happily on a dry dock or enjoying better weather in some other climate
What to Watch Out For
Bonds Go Down Too: Don抰 be mislead that bonds never go down. There is only one instance in which the value of a bond doesn抰 change ?that is when you hold it to maturity and, like a Certificate of Deposit, it will return the original, face value of the bond. At any other time prior to maturity, the market value of a bond goes up or down in response to the changing level of interest rates. If you own a bond mutual fund, the market value of the fund changes daily with the movement of interest rates. A mutual fund holding long term bonds has the potential to lose as much as 10% to 20% in value during a period of steeply rising interest rates.
This is the traditional approach to designing a portfolio mix that will help to control excess volatility; and it involves setting unchanging, fixed allocations in the different asset types (such as 60% in stocks, 30% in bonds and 10% in cash) Replica Hermes Strap.
You Can Take More Risk When You are Young
Traditional Asset Allocation — Balancing Risk and Reward
?Bonds, cash and real estate are all different types of asset classes that may be expected to offer some protection during a serious bear market.
This kind of portfolio diversification is called 揳sset allocation?because it involves allocating different percentages of your portfolio into different types of asset classes High Power LED Bulbs mysubmariner.
But what if you own 20 different stocks and then a bear market takes them all down? To help cushion your portfolio against that kind of risk you can diversify into different 揳sset classes?that may hold up in value when the stock market goes down.
Maximum Downside Risk Should be Considered: When you seek guidance on the right asset allocation mix for you, be aware that you can get wildly different answers from different advisors, and from different canned online tools mysubmariner. There are various reasons for this; but one main reason you can get very different answers from the experts is the kind of measure they use to define risk. Many advisors use statistical measures of 揾istorical market volatility?that do not effectively take into account the maximum loss potential of a major 揹estructive storm? These advisors are more likely to recommend you put a much higher percentage of your portfolio into stocks. Before accepting such a recommendation, know that the stock market has lost between 40% and 50% of its value three times in the past 35 years, most recently earlier in this decade. And of course, the Great Depression was much, much worse.
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