"Buy low, sell high" is the mantra of good investing. The problem? It's almost impossible to know when a stock has bottomed out or when it has reached its highest point.
Fortunately, you don't need a crystal ball to have a healthy investment portfolio. You just need to stick to your game plan.
When you first set up your investment portfolio, you need to decide on an
of stocks and bonds. The right combination for you depends on factors such as your age, your net worth and the amount of risk you are willing to assume. You can take a look at online tools such as
to get an idea of what's right for your situation.
While setting up the initial mix is an important first step to managing your portfolio, maintaining that balance is critical for your long-term financial success.
Say you're a young investor willing to take on a fair amount of risk. You decide on a mix of 80% stocks, 15% bonds and 5% cash.
After the first year, you take a look at your portfolio and notice that your stock holdings have dropped significantly. As a result, your portfolio now contains 70% stocks, 25% bonds and 5% cash.
In order to regain the right mix for your investment strategy, you must rebalance your portfolio, meaning you'll sell some bond shares and buy some stock shares.
Set a date to check in on your portfolio (every three, six or 12 months, depending on how active you want to be) and rebalance as needed, regardless of what is going on.
That means even if stocks are down when that date comes around, you should shift more of your portfolio into stocks until you are back to the right balance. In essence, you're selling winners and buying losers. But this is where many investors go wrong, according to Greg Shultz, a principal at
, a financial planning firm located in California.
"The reality is that most investors won't reallocate," says Shultz. "If stocks go up, they feel good, so they won't sell. Conversely, if stocks get low so that they are below their target allocation, they won't reallocate and buy stocks."
Shifting the money in your portfolio to maintain your target allocation is sound financial strategy. Meanwhile, sophisticated investors can take rebalancing one step further, drilling down within their stock allocation, for example, to look at diversification among sectors of the economy.
An individual sector can decline significantly more than the rest of the market -- the financial sector of the
is down more than 50% since early October, compared with a 20% decline in the overall S&P 500 index.
That doesn't mean you should blindly shift more money into the financial section of your portfolio. But you should be aware of how the different parts of your portfolio are straying from your initial allocation and make sure to rebalance at least once a year.
If you don't have the confidence to put more money into equities as the stock market dives, you can let the pros do it for you.
Funds such as the
set a target allocation and rebalance automatically as needed. You can invest your money and not worry about it -- at least until your investment priorities and, therefore, your allocation strategies change.
Peter McDougall is a freelance writer who lives in Freeport, Maine, with his wife and their dog.