With most markets taking a nose dive, it’s enough to make you run for the hills. Yet you’ve heard a lot of investment professionals tell you to “Stay the course.” But what does “stay the course” actually mean? It refers to maintaining the investment strategy that you put into action before the market crash, assuming it’s the right fit for your circumstances.
When someone refers to an investment strategy, they are typically referring to your asset allocation.
Asset allocation defines the specific percentage amounts of the different investment categories or “asset classes” allotted to your portfolio. This diversified mix of asset classes such as stocks, bonds, real estate and cash aim to maximize portfolio growth while minimizing risk. While there’s no guarantee a particular asset allocation will be better than another, having a proper mix of asset classes helps to optimize a portfolio.
Why is that? Because assets that behave differently under the same conditions counterbalance each other. Let’s consider a simple example. Generally when stock prices fall, bond prices go up. And when stock market prices go up, bond prices typically go down.
Asset allocation aims to maximize returns with lower volatility compared to investing in a single asset class. But when asset class prices change dramatically in relation to each other, as happened in the first quarter of 2020, the portfolio becomes unbalanced.
In other words, the asset allocation percentages you started with are significantly different and are not in line with your investment strategy. What should you do? Find out in Lesson Two of Asset Allocation.
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