As every investor knows, it’s hard to protect yourself in a volatile market. But what about crazy uncertainty, like when the media tells you that corona virus will shut down the economy for months – or maybe years? What is the best way to plan in a climate of uncertainty?
Asset allocation means don’t put all your eggs into one basket. Instead, spread your investments among several asset classes, such as large-cap stocks, small-cap stocks, bonds, cash, and perhaps even real estate. Diversification can lower your overall risk level, though it’s not a guarantee. To have a safer portfolio, you need to keep more money in cash and guaranteed bank deposits.
You can further spread your assets in many ways – across countries, industries, and market sectors. The trick is to find the correct balance so that you are making the most of your investment potential.
To learn more about types of diversification, namely passive vs. active management, read Profile-Financial.com/diversification
The process of asset diversification is only a first step. Periodically, you should rebalance your portfolio. Market movements may have shrunk certain portions of your portfolio while others may have grown, leading you to be overly concentrated in one particular market segment. Sometimes it’s prudent to sell some positions, locking in your profits, thereby protecting your gains but allowing yourself to continue to increase your existing profits even further. Depending on your individual situation, it may be wise to sell losses, and use the capital loss to lower your taxes. Before making a tax move, check with your accountant, as I do not give tax advice.
If you don’t have time to monitor the markets, or the thought of market volatility stresses you out, contact a financial professional for help.
While past performance is not a guarantee of future returns, don’t be afraid of market volatility. By following a logical plan of diversification and asset allocation, and timely re-assessments of your portfolio, you can be prepared to weather whatever the market brings.
Douglas Goldstein, CFP®, is the Director of Profile Investment Service, Ltd., which specializes in helping people who live in Israel with their US dollar assets and American investment and retirement accounts. He helps olim meet their financial goals through asset allocation, financial planning, and using money managers.
Published July 14, 2014. Updated June 2020