During the 2008/2009 stock market crash, it wasn’t too hard to find people telling you to re-evaluate your asset allocation and tolerance for risk. However, that was a terrible time to lower you portfolio risk; now is a much better time to consider this question.
It’s natural for your emotions to tell you to sell stocks after they’ve dropped and to buy more after stock prices rise. To a certain extent it is these emotions that drive stock market swings. However, it’s not too hard to see that this behaviour amounts to selling low and buying high, which is exactly the opposite of what most investors want.
Re-evaluating your asset allocation isn’t necessarily a bad idea, but there are wrong times to do it. The stock market lows of March 2009 were the wrong time to consider selling stocks. Even if you were right in deciding that your stock allocation was too high for your risk tolerance, making a change back then would have caused a permanent loss of capital.
Now would be a great time to consider lowering your stock allocation. Stocks have risen tremendously from their lows four and a half years ago. If you suffered through the stock market crash and doubt that you could handle it again, lowering your stock allocation now would not cause a serious permanent loss of capital.
I’m not saying that investors should sell stocks now. I’m just saying that if you must sell stocks, now is a far better time to do so than 2009 was.
We can flip this argument on its head as well. If you are considering increasing your allocation to stocks, the recent big run-up in stock prices makes now a bad time. 2009 would have been a much better time to decide to buy more stocks.
Most of the time the best thing to do is to stick with a sensible long-term plan. However, if you’re determined to change your allocation, the best time to do it is usually when your emotions are pushing you in the opposite direction.