Allocating your investment dollars is critical; if you want the money to work for you rather than fade into worthlessness while sitting in a savings account or a certificate of deposit (CD). Asset Allocation can also mitigate emotional risks, and allow investments to mature or have losses without wreaking havoc on an investor’s psyche. Overall, my ideal asset allocation looks like the following:
- Hard Assets 15%... includes real estate, commodities, and things like collectables.
- Equities 65%... can be divided into domestic and international holdings, mutual funds, and exchanged traded funds (ETFs).
- Bonds 10%... covers a wide range of options, including corporate, Treasury, and municipal.
- Cash10%... is cash and short maturity investments.
There are going to be dramatic losses in the stock market, no matter how’s your investment experience, caution, or vigilance. In fact, Warren Buffett, arguably the greatest investor in history, saw his $1.9 billion investment in UK grocery giant Tesco lose $750 million this week! This is not the first time he has lost a ton of money on an idea that seemed rock solid. Of course, he could afford to hold, and perhaps break even in a few years from now.
On that note, the reason Buffett is still smiling, is that Tesco’s loss is just a small part of a balanced equity portfolio. It is the biggest lesson. I cannot stress enough how important it is to have balanced portfolio.
Taking a loss is part of investing; and going for the homerun is fine, knowing this means taking this extra risk, so it should NOT be based on a hunch or the notion that share price alone determines value.
The market is in a shakeout phase. I suspect emotions will be tested, but selling should be based on fundamentals, just like when you are putting your portfolio together. Yesterday, I got another email from an investor friend that surmises what investors should be thinking during a period of pressure for the market:
“Ok there is blood in the streets and I have the mental fortitude to buy on the dips. Where are the recommendations?”
Buying the dips is a smart play, but trying to pick the exact bottom is folly. Let the dust settle, and chase a little at the bottom. I am bullish on the market, but that does not mean it will be smooth sailing; It rarely is, if ever.
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