How Active Should You Be?-SaveMoneyGuides.com
The Author
Hey, my name is admin, and I first published 'How Active Should You Be?-SaveMoneyGuides.com' on 27th July, 2008, within the Stock section.
From-SaveMoneyGuides.com-How active should you be in re-arranging your investment portfolio? For an ideal investor in an ideal world, the simple answer is as little as possible. But this assumes, of course, you always make the right decisions and that life is completely stable. In reality things change, in the economy at large as well as in your personal circumstances.
Are you an investor, or a trader? These operators adopt very different strategies and it’s important to know which you are. This article is aimed at the investor. The message is - don’t be a trader by the back door.
Know your goals
Investors have many different goals of varying priority, but most people’s highest goal ought to be building enough assets to provide sufficient passive income to fund their desired lifestyle. We should all be working towards this as our retirement plan, but the sooner it can be achieved the better.
It’s a good idea to conduct an annual (or at most biannual) review of your finances to make sure your investments still match your goals. Just so as you’re not doing this at the same time as everyone else, why not do it on or around your birthday? The purpose of the review should, hopefully, be to confirm that you’re on the right track. If you’ve done a good job at the buying stage, especially if the bulk of your funds are indexed, you shouldn’t need to do much.
Activity costs money, in fees and commissions, and possibly tax (where you’re taking a profit), so keep your activity to a minimum.
Buy and hold is a good strategy. Consider the story of Anne Scheiber, an IRS employee who invested $5k in quality stocks and watched it grow to over $22m over some 50 years. Scheiber didn’t trade, she simply chose wisely and held on, re-investing dividends.
As an investor you certainly ought to keep up to speed with financial news. But remember, most of it is just so much noise. Trying to profit from what you hear on the TV is most likely fruitless due to the efficiency of markets. As soon as a piece of news becomes public it’s immediately factored into stock prices. Always try to interpret what you hear on the news in the light of your own knowledge, experience and ‘gut’ feeling.
When to sell?
It would be great if you could sell your holdings just before the market drops and buy back just before it rises. Unfortunately nobody knows when it’s a top or bottom until after the event! Trying to time the market is usually a recipe for disaster.
But there are a couple of reasons we may need to sell. 1) We may need to use some of our capital, eg for a home deposit, school fees, or less happily to tide you through a rainy day; or 2) As part of a considered portfolio re-arrangement.
In case 2) what to sell forms part of the decision, but in 1) how do we decide? Remember, markets are (more or less) efficient, ie everything is at or about it right price. But different investments have different levels of risk. If you want to reduce your risk (and potential rewards) sell the riskier component(s) - and vice versa. Or you may want to move your portfolio closer to your ideal asset allocation, so sell what you’re overweight in. In choosing what to sell what matters is what you expect to happen in the future, not what’s already happened in the past.
When to buy?
Most people hopefully have some money left over each week/month after meeting life’s expenses. Regular investment is a great way to build a stake because you get to take advantage of dollar cost averaging - the lower the price the more you buy. A low-cost, efficient, index fund that allows regular contributions is ideal. Try to pay no more than 1% transaction costs - at maximum.
If you’re lucky enough to come into a windfall you might want to invest it all in one go if you feel the market’s favorable, otherwise you might want to put it into a high interest deposit account and drip it into the market gradually and benefit from dollar cost averaging.
What to buy should depend on the difference between your current and ideal asset allocations, and how you see things going in the future. For most people a good core default is a low cost index fund or ETF that mirrors the market. Of course even when using index trackers you need to decide what to track. The domestic stock market is a good place to start, but don’t forget there are other sectors, eg real estate, international markets.
