Further Thoughts on Repositioning a Portfolio
Because of the volume of positive comments from my last column, I wanted to share some additional repositioning strategies if you are inclined to move funds in this volatile market. First, let me reiterate that selling after you have lost may not be the best move - - often it's not. Better to be diverse and not so aggressive than to fall big and then try to sell. But for those who may have taken a bit too much risk and want to pull some money off the table, here is some further food for thought:
1. Compare how much you have lost in each investment from 1/1/08 to present with the S&P 500 index for the same time period. If your investment has fallen more than the index, perhaps selling is a mistake. Why? Let's assume your investment lost 15% year to date compared to an 8% loss in the S&P 500. If you'll rebuy back into another equity type of investment, then essentially you are selling at a 15% discount and rebuying into an area that is likely down about 8% - - that's a 7% deficit. You'd need to decide whether you felt comfortable taking a 7% hit.
If your investment hasn't fallen as much as the market, then count yourself lucky and consider whether to ride out the storm OR sell it and invest in something that has fallen even further. The idea would be selling low, but buying into something even lower.
2. If your investment is something more aggressive (or materially different) than the S&P 500 index, also compare your investment performance to the comparable index. If it is acting similar or better than the index, likely there is nothing really wrong with the investment and you just have to decide whether the volatility is something you can stand. Often your time horizon has a lot to do with holding or not. If your investment is performing worse than the index, you might consider cutting your losses.
A good example of this strategy could be applied to the real estate sector. Real estate is an area of the market that institutional investors and large endowment managers routinely hold for the long term because it typically moves independent of the stock market. Returns in this area weren't exactly great last year on the index, although many individual holdings faired pretty well. Year to date, many losses match about what the general market has lost. Therefore, if your sector or your investment holding is something you would likely hold onto for a long period of time and today it just happens to not look so hot, then perhaps holding through the volatility is warranted, assuming this only represents a slice of the portfolio. If the slice has gotten too big, then perhaps cutting some of your losses may be in order.
3. Stay away from sector investments that are too narrow. Sectors can be an excellent way to enhance returns in a difficult market, if you bet right. But trying to be so specific (i.e. buying a single country fund or gold or steel) can get you into trouble because these type of areas are more volatile - good and bad. Even putting a large percentage of the portfolio in one area that is broad can be still be dangerous. Better to limit the percentage you put in any one sector and be sure that the sector can cover lots of areas if you are feeling queezy these days. As an example, if you like the idea of investing in gold but know you are buying at a high in gold prices, consider a precious metals or general commodities investment that hits all sorts of areas and let the manager work out the details.
4. Use dollar cost averaging to your advantage. One potential way to win back losses in a falling market is to sell a portion of assets to cash and reinvest back a portion into those same investments (assuming they were sound in the first place) over a period of weeks or months. You earn interest on the cash and get to buy at lower prices if you are right and the market falls. The only catch is if the market turns up, then you buy higher.
If you are uncomfortable in today's market, it might mean you didn't have the portfolio positioned right in the beginning. Seek wise counsel. Listen for two or three trusted opinions who know your specific situation. Every case is different and unique and the above strategies are not meant to solve every situation for a nervous investor. They are meant to stir up further questions to help you decide on the best course of action.
1. Compare how much you have lost in each investment from 1/1/08 to present with the S&P 500 index for the same time period. If your investment has fallen more than the index, perhaps selling is a mistake. Why? Let's assume your investment lost 15% year to date compared to an 8% loss in the S&P 500. If you'll rebuy back into another equity type of investment, then essentially you are selling at a 15% discount and rebuying into an area that is likely down about 8% - - that's a 7% deficit. You'd need to decide whether you felt comfortable taking a 7% hit.
If your investment hasn't fallen as much as the market, then count yourself lucky and consider whether to ride out the storm OR sell it and invest in something that has fallen even further. The idea would be selling low, but buying into something even lower.
2. If your investment is something more aggressive (or materially different) than the S&P 500 index, also compare your investment performance to the comparable index. If it is acting similar or better than the index, likely there is nothing really wrong with the investment and you just have to decide whether the volatility is something you can stand. Often your time horizon has a lot to do with holding or not. If your investment is performing worse than the index, you might consider cutting your losses.
A good example of this strategy could be applied to the real estate sector. Real estate is an area of the market that institutional investors and large endowment managers routinely hold for the long term because it typically moves independent of the stock market. Returns in this area weren't exactly great last year on the index, although many individual holdings faired pretty well. Year to date, many losses match about what the general market has lost. Therefore, if your sector or your investment holding is something you would likely hold onto for a long period of time and today it just happens to not look so hot, then perhaps holding through the volatility is warranted, assuming this only represents a slice of the portfolio. If the slice has gotten too big, then perhaps cutting some of your losses may be in order.
3. Stay away from sector investments that are too narrow. Sectors can be an excellent way to enhance returns in a difficult market, if you bet right. But trying to be so specific (i.e. buying a single country fund or gold or steel) can get you into trouble because these type of areas are more volatile - good and bad. Even putting a large percentage of the portfolio in one area that is broad can be still be dangerous. Better to limit the percentage you put in any one sector and be sure that the sector can cover lots of areas if you are feeling queezy these days. As an example, if you like the idea of investing in gold but know you are buying at a high in gold prices, consider a precious metals or general commodities investment that hits all sorts of areas and let the manager work out the details.
4. Use dollar cost averaging to your advantage. One potential way to win back losses in a falling market is to sell a portion of assets to cash and reinvest back a portion into those same investments (assuming they were sound in the first place) over a period of weeks or months. You earn interest on the cash and get to buy at lower prices if you are right and the market falls. The only catch is if the market turns up, then you buy higher.
If you are uncomfortable in today's market, it might mean you didn't have the portfolio positioned right in the beginning. Seek wise counsel. Listen for two or three trusted opinions who know your specific situation. Every case is different and unique and the above strategies are not meant to solve every situation for a nervous investor. They are meant to stir up further questions to help you decide on the best course of action.
posted by Shari Burnum @ 3:38 PM
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