Michael?Montuori, BridgeTower Media Newswires
With the stock market hitting new highs lately, many of our clients are wondering: how long can this last and should they invest even more in the market or bail out before it may fall?
When constructing a portfolio, investors decide how to balance risk and reward based on their financial goals, their investment time horizon and how much risk they are willing to bear. They then decide how much to invest in three main asset classes – equities (stocks), fixed income (bonds, certificates of deposit) and cash/cash equivalents. Periodically investors may reallocate or rebalance their portfolio in order to maintain the original asset allocation. Rebalancing is not necessarily intended to increase returns; it is designed to manage risk.
We find that our clients are more concerned about losing money in a rising market because they are anticipating a decline than they are about missing out on returns should the market continue to climb. Our job as advisors is to remind our clients that investing is for the long term. We urge them to adhere to their financial goals and reevaluate their risk tolerance in relation to their asset allocation. On occasion investors feel like they should “take the money and run.” We try to discourage that inclination because they will miss out on future potential growth. We revisit their asset allocation and rebalance or adjust as needed.
Formulating the appropriate asset allocation necessitates a conversation with your financial advisor in order to see what the allocation should be now and how it may change going forward. We sometimes pose a difficult question to our clients: Which is worse – selling your stock and watching the market rise without you or staying in the market while it declines and possibly losing your gains? How an investor responds to this question may help frame their asset allocation.
Real life circumstances affect asset allocation especially in terms of how much to invest in equities. If you need the money in the short term (within about five years), you should consider keeping your money safe – CDs or cash alternatives. If you know you wouldn’t be able to stomach watching the market drop, perhaps you should allocate less to equities. The stock market can be a roller coaster. If you cannot afford to lose money and you’ve designated a sum or money for a down payment or a particular purchase, you should consider shielding that amount from the stock market. Again – your allocation would be less in equities in this situation.
Time and quality are the key ingredients when investing in the stock market. Do not get caught up in the latest fad and try to weather short term fluctuations. Make sure you understand your asset allocation and the investments you have. That will help you stay grounded for the long term.
Asset allocation cannot eliminate the risk of fluctuating prices and uncertain returns.
The opinions expressed in this report are those of the author and are not necessarily those of Wells Fargo Advisors or its affiliates. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy.
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Michael J. Montuori, CRPC, First Vice President-Investment Officer, Wells Fargo Advisors.
