Sorry to have been away so long. It's been an interesting month, in the Chinese sense.
During periods of market turmoil, we are all reminded by the best advisors and investors in the world of the basic principles of investment sanity. However, these principles should not be applied blindly, or you may make mistakes despite your diligence. In this next series of posts, I'd like to lay out these principles and explain how they should be PROPERLY applied, and when they don't work.
Principle #1 - Buy and Hold
Yes - chasing hot stocks or funds is amusing in the short run but disastrous in the long run. A properly designed portfolio has a DIVERSIFIED set of holdings representing multiple asset classes that have been put together with a plan in mind. Any one holding at any one point in time may not look like it's doing well - which is normal, as different assets perform differently in varying market environments - but the portfolio as a whole will progress over time. Yes, when the market goes completely nuts (as it has recently) everything seems to go down, even bonds, but that's a temporary condition.
But #1 - be sure that you have a diversified portfolio. If you own five large cap growth funds and nothing else, you are not diversified. You will be the victim of the ups and downs of a single asset class. More of the same is not diversified
But #2 - be sure that you rebalance! This is the essence of another principle to be discussed later (buy low, sell high). Especially after a period of market craziness, your portfolio may no longer look like its original design - you may be too high in bonds and too low in small cap equities. At this point, when you rebalance, you sell some of the "winners" (bonds) and buy some of the "losers" (small cap equities). Sell high (bonds), buy low (small cap equities) - sounds right, doesn't it? However, psychologically, this can be difficult which is why you must have a planned portfolio and make a commitment to stick to the plan. Who wants to sell their safe Treasury bills and buy scary stocks this week?
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