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Don’t Bury Your Head in the Sand

I recently posted that you should not panic, nor should you fall prey to those who will sell you on the belief that they can time the market. What should you do? Decide on the proper asset allocation and rebalance as appropriate. Say you had $100K in early 2004, and to keep it very simple, you had 60% in stocks, 40% in cash. Like this:
Now, you’ve ignored the account, and look now to find the stocks have grown (there were some dividends, so that $82,612 includes reinvested dividends) so instead of your mix being 60/40, you’re pushing 64/36. Very simple. It’s time to sell just a bit over $5000 of your stock index fund or ETF to bring the account back into balance. Your stocks will likely be in more than one fund, to include foreign stocks, and to add the stocks not in the S&P (small and mid-cap stocks), and the cash portion may be mixed in bond funds as well as cash for shorter term needs, but the concept is the same. A periodic review to be sure your allocation targets remain in place. Some people choose to reallocate on an annual basis, maybe at year end as they do their year end tax planning, others will reallocate as the percentages vary from target by more than some percent, perhaps 5. So in my example above, you may choose to wait to reallocate until stocks are above 65% or below 55%.

See the links at my friend Elle’s site for tools to help you decide on the asset allocation that’s right for you.

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