Here are the lessons we learned about investing in 2020: The market is not the economy. Don’t fight the Fed — when interest rates are so low investors have nowhere else to look for returns, they’ll put it in the market (and, okay, into Bitcoin). And when you give stimulus dollars to people who are actually doing just fine, they’ll invest that money, buoying the markets as well.
Could we have predicted back in March when the coronavirus pandemic brought the economy to its knees and sent stocks plummeting that we would end the year with stocks back on top? Many prognosticators didn’t. And yet the advice that made the rounds on social media — to treat your 401(k) like your face and keep your hands off — turned out to be the best going.
So, as we head into 2021, what’s the best advice for now? On The HerMoney Podcast, we broke things down for you whether you’re in your 20s, 30s, 40s, 50s, 60s or beyond. Meanwhile…
REBALANCE IF YOU NEED TO
This has been an uneven rally — with tech stocks leading the way and many other companies struggling to catch up. It wasn’t until November, when 467 stocks in the S&P 500 had up months, that the Wall Street Journal reported that the rally was finally “widening.” Depending on your holdings, this uneven playing field could have left you taking a lot more (if you’ve got a lot of tech) or less (if you don’t) risk than you’re comfortable with. Take a moment to look at your asset allocation and adjust if need be.
It’s really important to rebalance, making sure your accounts are aligned to your financial goals,” says Leanna Devinney, an assistant branch manager at Fidelity’s Framingham Investor Center. “With stocks going up and down, asset mixes have likely veered off course.”
KNOW YOUR NEW INVESTMENT RISK TOLERANCE
Before you can begin to consider rebalancing a portfolio right now, take the time to reassess your risk tolerance. With many parts of the economy still halted and unemployment rising once again, it’s still not clear when businesses will return to normal. All of that may have altered the amount of risk you can handle. And remember where we started: It doesn’t help that prior to the pandemic stocks were enjoying a more than ten-year bull run. That may have resulted in heavy exposure to stocks, something you aren’t as comfortable with today.
LISTEN TO THE HERMONEY PODCAST: How To Take Your Investments To The Next Level
There are many ways to approach rebalancing, but for the average investor, a good starting point is with your mix of stocks, cash, and debt. This mix should still be aligned with your long-term investment strategy prior to the pandemic. Let’s say your ideal investment mix is 70% stocks, and 30% cash and bonds. If it moved away from that over the last few years, it’s time to rebalance. Understandably, buying more stocks to increase your exposure may conjure up some fears — who knows if equities will be up or down at any given moment and if and when the economy will recover?
To get around those sometimes paralyzing concerns, Devinney at Fidelity says instead of moving holdings in the portfolio, direct any new contributions toward stocks until the percentage is back at pre-pandemic levels. Low-cost exchange-traded funds, mutual funds, and index funds are great ways to get stock exposure without having to pay too much in fees.
LOOK AT YOUR SECTOR HOLDINGS
But rebalancing doesn’t have to end there. It can also be applied to the sectors within your portfolio. Let’s say you were among the lucky investors to have a position in Zoom Video Conferencing, the popular video conferencing app that — although it’s fallen off it’s highs — is still up fivefold over the past year. Or Tesla which is up even more. That may have pushed your tech exposure higher than your comfort level, requiring you to reduce your position in that sector. Also, for savvy investors who have the time and know-how, rebalancing can also occur at the stock level. Just know that it won’t be easy during the pandemic. Volatility isn’t expected to go away any time soon, which could result in investment mistakes.
TAKE BABY STEPS WHEN REBALANCING
The last thing rebalancing investors should do is alter their portfolio in one fell swoop. Baby steps are almost always better in times of stock market uncertainty. “If you need to adjust something, sell a certain sector, or buy another sector — do about 25% of it,” says JJ Kinahan, chief market strategist at TD Ameritrade. With all the stock market volatility, that may be all that’s needed to get your portfolio back in balance. If in a couple of weeks it’s still not aligned, you can then do another 25%. “Investors’ biggest mistake is they think it’s an all or nothing world,” says Kinahan. “Professionals always think in terms of things being iterative.” Slow and steady is important now more than ever, given there’s little in history to draw from. Sure, there was the Spanish Flu of 1918, but how many investors do you know from back then?
STAY THE COURSE WITH NEW (AND OLD) INVESTMENTS
When it comes to rebalancing in tumultuous times, it’s understandable to want to check your portfolio every week, but rebalancing should be like investing: Set it and forget it. That doesn’t mean you should bury your head in the sand, but once you rebalance, hold off on making more moves for at least a few months. If you use a digital platform to invest, you’re in luck. Most will alert you once your portfolio is out of alignment.
The most important thing for investors to do in this environment is to ignore the noise and stay the course. Overreacting will cost you money and stress you out — two things you absolutely want to avoid. Don’t let yourself get caught up in the emotion of the moment.
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