The Importance of Asset Allocation
Solomon said that there is nothing new under the sun. I agree with him especially when it comes to investing. Beware of these common mistakes which I have witnessed investors making repeatedly over the last twenty five plus years.
#1 Chasing Last Year’s Winner
This is very common when investors enroll in their 401k plan. Without any direction, they look at the choices they have to choose from and judge their options by last year’s performance. This can be a recipe for disaster. Whether you are enrolling in your 401k or evaluating your existing portfolio, focusing solely on last year’s performance in making investment decisions is a mistake.
#2 Allowing Emotions to Dictate Decisions
Technology is wonderful in the right perspective. When I first started in the business, the PC wasn’t in every home. You didn’t have the cable financial shows and you didn’t have the twenty four hour news cycle. Today, you are bombarded with information that is presented in a hyper emotional way. Just listen to the music on the cable financial news show. It is designed to hype you up and keep you watching. Unfortunately, you can allow the emotion to spill over into your investment decisions. Your investments should match your long term goals not the beat and tempo of your favorite investment tv show’s theme song.
#3 Not Having An Exit Strategy
You love XYZ stock. It is performing great. What is your exit strategy? Most investors do not have an investment exit strategy for their stock holdings. This is a major mistake. You should have an exit strategy on both the down side and the up side of the stock.
There is a simple strategy that helps one avoid these three common mistakes. It is simple. Reallocate your portfolio among different asset classes on a regular basis. It avoids mistake number one because you will diversify among many asset classes. If you reallocate on a regular basis you aren’t ruled by emotion. You have a long term plan. Your exit strategy? You rebalance your portfolio regularly. When your exposure to a certain asset class becomes to high, you sell and purchase an asset class that is underweighted. It sounds like the old adage, ‘Buy Low and Sell High.’ The goal of every investor.
Asset allocation does not ensure a profit or protect against a loss. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.
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