With all that is going on in the market today, my next few posts will focus on ways to help you “weather the storm”.
There are many factors to consider in the proper allocation of your portfolio during a strong or weak market. It is important to have a good understanding of the difference between “growth ” and “income”.
- Growth/return can be described as the difference between the price you paid for an asset and the current value (assuming no assets were added or withdrawn during the same time period).
- Income/yield can be described as the dividend or interest an asset provides.
History has shown that typically over the long-term growth-oriented assets have outperformed income-oriented assets regarding the total return on the investment. However, history has also shown that growth-oriented assets are much more volatile and therefore more apt to experience times when your investment will be worth less than the amount originally invested.
It is important to keep in mind that although over the long-term, growth-oriented assets have greater return potential, in order to receive income from these investments, you have to sell all or a portion of the asset. Whereas yield or income-oriented investments, normally provide a regular monthly or quarterly yield that can provide for your regular income needs even though the long-term return of these investments may be lower.
It is important to note that selling an asset when the market is down may not be in your best interest. This may mean that you bought the asset when the market was high after the value went down you sold it and, if the market later rebounds you will not be there to receive the benefit.
It is also important to keep in mind that typically assets with greater return potential also have greater risk. It is just as important to assure your portfolio is positioned within your risk tolerance comfort level as it is to position it for growth.
“Timing” the market and choosing “the best” investments are not reasonable expectations.
What is reasonable is to evaluate the following to be able to choose an appropriate asset mix for your portfolio:
- Your risk tolerance comfort level – you should consider using the same risk level in good markets and weak
- The amount of income you need
- How long you are planning the income need
- Your tax bracket
- Your comfort level in managing the assets on your own – how much input and control you want to maintain
- Your mental ability to “stay the course” in the event you see a decline in your portfolio value – To have a plan and stick with it.
- Cash reserve available that is not included in your investment portfolio
Keep in mind: Know one can really know what the future holds for interest rates, inflation or the stock market. Therefore “timing the market” is not a reasonable expectation.
Knowing your feelings regarding this uncertainty can help to put together an appropriate portfolio to provide for the goals that are most important to you.