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Don't Let Stock-Market Rollercoaster Toss You Off Your 2015 Investment Plan


Plunges in energy and international stocks can offer rebalancing opportunities; Avoid "recency bias."


Don’t let the stock market’s rollercoaster bumps throw you off your long-term investment plan.

Some people see energy stocks crashing and sell everything. Others want to put everything in US large cap stocks like the S&P 500 index because it’s done well over the last couple years. It’s human nature to be overly optimistic or pessimistic in believing recent market trends will continue.

But recency bias is one of the most common and dangerous quirks of investor psychology.

Take the opposite direction of recency bias. When you rebalance, sell your top performers and add to your laggards.

If you’re underweight in natural resources and energy stocks, it’s a great time to add to your holdings. I recommend putting 7.5% of one’s equity portfolio in natural resources funds that invest in energy, materials, and similar stocks.

Foreign stocks have also been down recently, making them ripe for boosting your allocation when rebalancing your portfolio. I recommend having about 35% of your equity allocation in foreign funds.

Rebalance whenever any allocation gets about 10% out of whack. So, if you agree with my recommended 35% foreign equity stake, you would pare it back to the target allocation if it hits 38.5% or higher and add to it if it dips below 31.5%.

If you allow your portfolio to simply “follow the market” and never or very infrequently rebalance, you will end up with high allocations to assets that have done well recently, and low allocations to investments that have performed poorly recently. This tends to increase the risk in your portfolio over time.

When you sell your recent winners and buy more of the recent losers, you are selling high and buying low, though not necessarily exactly at the top or bottom. Over time rebalancing will lead to superior long-term results because investments revert to the mean over the long haul. Rebalancing is the opposite of a market-timing strategy: it’s about staying disciplined.

Lower Your Costs and Taxes Too

When you rebalance, revisit the universe of mutual funds and ETFs and ensure you are using the most cost-efficient ones available. Sometimes mutual funds create new share classes that have a lower expense ratio.

You may also find a very similar fund or ETF that has basically the same market exposure, but much lower expenses. But be mindful of the trading costs and possible tax costs to switching out an investment. It doesn't always make sense to trigger commissions and taxable gains just to save a few basis points of expense ratio.

As you rebalance, consider the tax efficiency of your portfolio. Can you get rid of some of your active funds that trigger high capital gains and thus tax burdens year after year? Look for more-passive strategies that may have similar market exposure and returns, but with much lower turnover and better tax efficiency.

You may also want to move certain tax-inefficient assets, like REITs and high-yielding bond funds, into IRAs or other tax-deferred accounts to minimize the annual tax burden.

The suggested asset allocations above are only for the equity portion of a portfolio. The overall allocation between bonds and equities varies for each individual.

Anthony D. Criscuolo, CFP® (Certified Financial Planner) is with Palisades Hudson Financial Group’s Fort Lauderdale office. He writes about investing in Palisades Hudson’s new book, “Looking Ahead: Life, Family, Wealth and Business After 55.” Information about the book is at www.palisadeshudson.com/book. The 326-page paperback and Kindle ebook is available from Amazon at http://tinyurl.com/ocro2dx and Barnes & Noble at http://tinyurl.com/m9ca3qk.

Palisades Hudson is a fee-only financial planning firm and investment adviser based in Scarsdale, N.Y., with $1.3 billion under management. It offers investment management, estate planning, insurance consulting, retirement planning, cross-border planning, business valuation and appraisal, family-office and business management, tax preparation, and executive financial planning. Branch offices are in Atlanta, Fort Lauderdale, Fla., and Portland, Oregon. Read the firm’s daily column on personal finance, economics and other topics at http://palisadeshudson.com/current-commentary. Twitter: @palisadeshudson.

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