The massive correction we’ve seen since October has been testing our risk tolerance levels. It’s an excellent test of the balance of stocks to other investments in your over-all portfolio. If you realize that the downturn in the stock market brings you sleepless nights or your risk tolerance has changed , reassess your asset allocation. You simply have too much money in stocks.
Everyone, no matter what age, should own stocks. It is one of the few ways available to keep pace with inflation. But most investors own only stocks, and usually the wrong kind. If you haven’t been able to ride out this market without constantly monitoring your balance or worrying about the indexes, it could be a warning sign. Or if you have already made the biggest mistake and gone to cash to “cut your losses” or “wait out the sell-offs,” you definitely own the wrong securities and, very likely, no other assets. What panic-selling really does is ease the feeling of market and account value dread. Cutting your losses does nothing but establish them. Instead, shift to reliable, stable investments that produce predictable returns.
The older we get the more we should invest in conservative stocks: large caps, proven survivors, dividend-payers and those that increase their dividends. But it is not only the fact we own the wrong stocks also the (complete) absence of the stabilizing force other assets offer. We need other assets with none or negative correlation in our portfolio. Assets that might not fluctuate in value as much as stocks. This can add market price stability and reduce account value dread, which lowers the chances that you will panic and sell.
If you could not sleep in the last couple of months and try to avoid the account value dread again, you need to reassess now!