University of Illinois Extension Services

Stock Market Turbulence Is a Reminder to
Check Your Asset Allocation, Risk Tolerance

Perhaps you were blissfully unaware of the wild stock market ride on May 6. But if you were following the news, how did you react? Were you panicked, wishing you did not have so much of your portfolio in stocks? Perhaps you intended to rebalance your portfolio after the market gains over the last several months—selling some of your stocks and boosting bonds or cash to get back to your target asset allocation—but did not get around to doing it. Now you regret that you procrastinated.
Experiences like this are another wake-up call to make sure that your investments match your goals and your time horizon, as well as your emotional ability to handle risk and your financial capacity for risk.

Karen Chan, University of Illinois Extension consumer and family economics educator, offers these suggestions:

• Monitor Your Asset Allocation
Set up an easy way to monitor your asset allocation so that you will know when you need to rebalance. If you work with an investment adviser, ask if he/she can generate an alert when your allocation is out of balance by more than, say, 5 percent. You can also track your own asset allocation if you enter all of your investments into software such as Quicken, websites such as Mint.com or Morningstar.com's Instant X-Ray, or tools offered by your financial institution. Some retirement plans even offer automatic rebalancing for that portion of your portfolio. One downside is that many of those tools will not generate an automatic alert to rebalance, so you have to remember to check it yourself.
• Take Advantage of Market Fluctuations
Let dollar-cost-averaging work for you. Do not stop your payroll contributions to your 401(k) or other retirement plan when the market gets crazy. Let’s say you are putting money into Mutual Fund EFG. By contributing the same amount each payday, you force yourself to buy more shares when the price of EFG is down and fewer when the price goes up. Buying more when it is cheap is smart investing.
• Prepare for Retirement
If you are five years or less from retirement, calculate how much money you will need each year in retirement to cover expenses. Subtract income you will receive from pensions, Social Security or annuities. The remainder needs to come from your investments, including employer retirement plans and IRAs. To avoid having to sell those investments when markets are down, you may want to shift enough money to cover one year's expenses into a CD maturing in your first year of retirement. Next year, you can sell enough to cover another year's worth of expenses, and put that in a CD maturing in your second year of retirement. Continue each year, building a ladder of CDs to cover three to five year's worth of expenses. If the market tanks one year, you can skip selling investments that year and live off the reserve you have built. When the market recovers, sell extra to rebuild your cushion.

The stock market might not have another day like May 6, 2010, for years to come. However, if you faithfully rebalance and keep money for short-term goals out of the stock market, you will be prepared when (not if) it happens again.
 

Source: Karen Chan, Extension Educator, Consumer and Family Economics