A list of what-ifs for investors looking back to the start of the stock market crash one year ago:
What if you sold your stocks one year ago and sat out the carnage?
What if you jumped back into the market in the early spring, just as the seemingly unstoppable market rebound began?
What if you got past your investing fantasies of the past year, your regrets, your mistakes, your good intentions gone awry and your bad habits indulged? What if you accepted the most basic fact of investing and moved on.
“Just admit it,” said Jon Palfrey, vice-president at the Vancouver-based money management firm Leith Wheeler. “You can't predict the market.”
So stop trying to anticipate the best times to get in and out of the market. Instead, consider a super-simple strategy that offers a degree of protection against down markets and ensures you get a taste of rising share prices. It's called rebalancing and it addresses the biggest lesson of the past year, which is that you never really know what the market is going to do next.
Rebalancing works on the following idea: Find a mix of stocks and bonds that suits your needs and stick with it, no matter what the markets are doing. In other words, it takes the guesswork and the randomness out of investing and imposes order.
“Rebalancing offers some discipline – a process – instead of emotions,” Mr. Palfrey said.
Let's say you're a moderately aggressive investor and you find that having 60 per cent of your portfolio in stocks and 40 per cent in bonds is ideal from the standpoint of addressing risk and still getting you the returns you need to achieve your goals.
Some experts recommend rebalancing every six months; Mr. Palfrey suggests quarterly adjustments. Either way, you revisit your portfolio to make any adjustments required to get back to the 60:40 mix.
In the middle of 2008, when the stock markets were peaking, you most likely would have sold some of your stock market exposure as part of a rebalancing and added bonds. As stocks fell, government bonds rallied because they're much safer. By year's end, your rebalancing would have meant buying stocks or equity funds with money taken out of your strong bond holdings.
Since then, the stock markets surged higher and the stocks you picked up in the past six months should have grown in value. Next order of business: Get your stock market exposure back down to 60 per cent as of your next quarterly rebalancing.
The first step in adopting a rebalancing program is to get your asset mix right. The key here is to consider your ability to live with the risk of losing money, said Norman Raschkowan, chief investment officer at Mackenzie Financial.
One of the lessons of the past year was that too many people have overestimated their ability to stand big losses in their portfolio, Mr. Raschkowan said.
“The reality is that people have a conceptual view of what their risk tolerance is,” he said. “But when they actually see their investment values dropping, they discover that perhaps their risk tolerance wasn't what they thought it was.”
Two elements that Mr. Raschkowan suggests you throw into your thinking about risk are your time horizon, or the length of time until you will need the money you're investing, and the amount of money you can afford to lose without blowing up your financial plan.
Don't let the rapid improvement in the stock markets influence your thinking on risk tolerance, he added. “I certainly hope that people will recall the urgency and the unease that they felt six months ago.”
