Find the right asset allocation, use it and give it the time to work. That was the message at a recent event hosted by Fidelity Investments.
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At a midyear outlook event hosted by Fidelity Investments last week, experts agreed that investors are better off with the right mix of funds — even average and mediocre funds — than they are trying to always find the “best” funds.
The message was clear: Find the right asset allocation, use it and give it the time to work.
But that’s easier said than done, as was proved by the conversation at Fidelity’s Inside/Out event, which included both Fidelity managers but top investment strategists from Oppenheimer Funds, State Street Global Advisors and others. While preaching patience and savvy allocation, the conversation kept veering back to current events and what to do now or next.
“It’s very tempting for a lot of investors when you see your portfolio go down to sell and when you see the market has been up, to buy in, but often times you sold after you already had the loss or you are buying after the market has already run up,” said Joanna Bewick, portfolio manager for global asset allocation for Fidelity.
“You need to focus on the risk profile you are trying to achieve, and what are the portfolio weightings that get you to that target,” she added. “Having disciplined rules in place around your asset allocation can be a very good way to discipline oneself to buy low and sell high.”
The problem is that most investors don’t have rules for themselves, or justify breaking the ones they have when it’s convenient. They’re not “buying the hot asset class” when they follow today’s hot trend into China funds, they’re “diversifying.”
I came away from the Fidelity event thinking about rules that would help most fund investors stick to their plans so that their asset allocation plan pays off.
The most common rule for allocation-oriented investors involves rebalancing, which involves selling leaders and buying laggards to put a portfolio back to its target allocation. An easy rule is to rebalance whenever the market moves a portfolio five or 10 percent, meaning that if your plan is to be 60 percent in stocks and 40 percent in bonds, you realign assets when the portfolio stands at 55-45, 65-35 or 70-30.
In thinking about rules that met the “set a course and stay with it through this cycle” message from the experts, my focus was on staying disciplined. Here are the self-restraint guidelines that came to mind:
•Ignore recent performance.
Consider money flowing into China Regions funds right now which, according to Morningstar, are up about 20 percent year-to-date, on average.
If you’re making a “diversification decision,” rather than chasing hot performance, consider that the average fund has an annualized gain less than half that size over the last five years and is up about 11 percent on average for the last decade.
Buy thinking you may get the long-term results of the asset class and you tune out the short-term market noise.
• Don’t sell a fund until it disappoints you twice, and “yesterday” and “this week” don’t count.
Even the best funds have disconcerting stretches. Don’t ax a fund just because it has a bad quarter or looks ugly year-to-date; make sure it has two different periods where you were disappointed, so that you don’t just pull the rip cord the first time there’s turbulence.
No one can suggest you were too reactionary when you wait for your second gut-level reaction to make a move.
• Have three key reasons for making changes.
The idea at the Fidelity conference was that performance alone is not a reason to make a change, so consider what else — good or bad — is prompting your change. It might be that the fund has changed managers, or that your risk tolerance has changed with age, or that you see the benefits of adding a new asset class to your long-term mix.
If performance is your only reason to change holdings, you’re chasing results and unlikely to catch good ones.
• Keep changes to no more than 5 or 10 percent of your portfolio at a time.
The idea here — as with rebalancing — is to stick with a sound allocation strategy, rather than knee-jerking after tactical plays based on what’s happening now kills an allocation plan.
Tweaking a portfolio on the edges helps provide the right mix of active management with letting your strategy work. It lets you tilt the portfolio strategically, without letting you blow it up.
“Buy on the assumption that they could close the market the next day and not reopen it for five years.”
Warren Buffett said that. It’s a great way to ensure that you don’t buy in without being ready to stay put. As much as anything, it gives your investments ample time to live up to the benefits of having the right asset allocation.
Source - The Seattle Times
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