Q. I’m a buy and hold investor. We’ve had a lot of volatility lately with President Trump, and it’s not all on the upside anymore. How can I decide what investments I should change?
A. You haven’t told us anything about your age, financial situation or specific investments, so let’s just talk generally about the issues involved.
You said you’re a buy and hold investor.
“Buy and hold investing generally involves buying stocks or other investments and holding them for long periods of time, such as years or even decades, regardless of temporary fluctuations in the market volatility,” said Gene McGovern of McGovern Financial Advisors in Westfield. “The assumption behind buy and hold investing is that over the long term, stocks will increase in value despite occasional corrections and market downturns.”
With a buy and hold approach, you don’t try to time the market, as history shows that this is generally unsuccessful, McGovern said.
He said a good example of buy and hold investing is index mutual funds, which own a basket of stocks or other securities that are tied to a market index such as the S&P 500. If you prefer active to passive investing, you can do the same thing by holding individual stocks.
Buy and hold investing has numerous advantages.
“Among these are that trading costs, as well as taxes from capital gains, are minimized as compared with active trading because few stocks are bought and sold at any given time,” McGovern said.
Whether passive or active, investing should take place within the broader context of strategic asset allocation, he said. That means determining which asset classes to hold in your portfolio and in what proportions, based on your age, goals, time horizon, asset location — taxable or retirement accounts — risk tolerance, and risk capacity.
For example, McGovern said, you might find that a traditional balanced portfolio of 60 percent stocks and 40 percent bonds is appropriate. If you’re older or more conservative, the portfolio could be tilted more heavily toward bonds and cash, while if you’re younger or more aggressive it could weight stocks more heavily.
Within those broad asset classes, further allocations can be made, such as between domestic and international stocks, large company vs. small company stocks, or corporate vs. government bonds, McGovern said.
Because asset classes perform differently over time, strategic asset allocation also involves periodically rebalancing your portfolio back to your chosen allocation, he said. That means selling some portion of the asset classes that have done well and investing the proceeds in those that have not done as well. You’ll also want to revisit your allocation over time to ensure that it remains consistent with your situation and goals, he said.
That brings us back to your question.
“If the current volatility in the market is making you think about changing your investments, it may be time to revisit your overall asset allocation in light of your risk tolerance and goals,” he said. “You can find numerous investment risk tolerance questionnaires for free online, as well as suggestions for corresponding asset allocations.”
McGovern said in the end, investing always represents a fundamental trade-off between risk and return. Increasing your investments in less volatile and less risky asset classes such as short-term bonds and cash, certificates of deposit or money market mutual funds, can help you to weather volatility, but likely at the cost of lower potential returns, he said.
You’ll want to make that decision within the broader context of your strategic asset allocation and goals.
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