Tuesday, May 19, 2009

Maintaining Your Asset Allocation

In a very unscientific poll of a few acquaintances who claim to have a fixed percentage asset allocation between stocks and bonds, I asked whether they did any trading to maintain their percentages through the recent stock market turmoil. It turns out that none did.

The idea behind asset allocation is that when bonds are cheap, you sell some stocks to buy more bonds, and when stocks are cheap (as they were a couple of months ago), you sell bonds to buy stocks. If done properly, you are buying low and selling high.

However, if the few people I spoke to about this are any indication, even investors with a fixed plan often aren’t managing to follow their asset allocations at the very time when it would be most beneficial.

It takes courage to buy when the world seems to be crashing down around you. However, a financial plan isn’t worth much if you don’t follow it.

4 comments:

  1. Sadly, it's far too easy to become frightened - just as the time when it's most advantageous to make a change in one's allocation of assets.

    I think it's just human nature to fear buying stocks as they crash or sell them as they surge.

    The only solution that works is to have the discipline to make needed changes every six months or year, regardless of the market prognostications of the investor.

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  2. ya its true people have to learn to stick to they're financial plans. whats the point of making them if you can't stivk to them.

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  3. Michael, I had a look at my allocation and it wasn't far off my targets despite the turmoil. I think some equities like European markets fell more than others but by the time I was getting round to doing the rebalancing trading, prices had changed again and things were in close enough match to my target allocation that it wasn't worth it.

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  4. Canadian Investor: Does your asset allocation include bonds? If so, they must have swelled well beyond their normal allocation, and you lost an opportunity to trade some of them for cheap stocks.

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