You’ve heard it often: “Buy low, sell high.” It’s sounds like a simple concept, and when properly executed ensures you make money in financial markets.
Trouble is, most of us are dismal failures when it comes to this strategy. Trying to “time the market” by moving in and out of investments at their valleys and peaks is notoriously difficult, even for professionals.
Many investors end up doing just the opposite-buying or selling individual securities and even mutual funds at the wrong time. They buy in an emotional frenzy, when prices are at their peak, and are left holding the bag when prices fall. Or they sell when prices are low and remain on the sidelines when they rebound.
Investors who try to jump in and out of major asset groups-such as stocks and bonds-make similar mistakes. For example, when stocks are falling they may wait too long before making an exit, missing out on rebounding prices later. When they move back into stocks, they buy at higher prices.
All of this can be costly to investment returns by reducing profits or magnifying losses. So what’s the alternative?
For most investors, a buy-and-hold strategy works much better. By investing for the long-term and ignoring short-term fluctuations you stand a better chance of making respectable long-term investment profits and become less concerned with market volatility.
The best long-term buy-and-hold strategy is achieved through effective asset allocation. Including a mix of asset types in your portfolio means you can tailor investments to reflect your financial goals, take advantage of a wide range of opportunities, and provide protection against market swings.
Because nobody knows in advance when one asset class will outperform, it’s best to be invested in all sectors at all times. A balanced portfolio lets you take advantage of upturns in prices, at the same time offering protection against a decline in any one asset class. For example, while growth investments such as stocks are on the wane, income investments such as bonds may outperform.
You can diversify among asset classes through investments in individual securities or mutual funds. A portfolio of mutual funds is easily diversified by investing in different fund categories-such as equity, bond, balanced and money-market funds.
There is no ideal asset mix for everyone. It depends on your goals, tolerance for risk and other factors. Your mix will also be affected by your age. When you’re young you should focus more on growth, moving toward more conservative assets that help preserve capital when you’re older. But no matter what your stage of life, your portfolio should remain diversified.
How do you make sure your asset mix is appropriate? Work with your financial advisor. A professional can help you assess your current portfolio, decide on a suitable asset allocation strategy for your needs and goals, and help you invest accordingly.
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