Stuck In The Middle Of Rebalancing
October 1, 2009 – 4:34 am
Over a year ago I decided to adjust my asset allocation as well as my asset location, and now I’m stuck in the middle of the process. I understand that you shouldn’t try to time the market, but likewise I think it’s prudent to recognize that some asset get overpriced and underpriced from time to time.
The issue I face is that I have most of my equity positions in place, but with the flight to safety occurring all year the price of fixed income securities have gone up substantially. I don’t want to wait forever to finish out my reallocation, but then again I’m not sure what criteria I would require to finish the moves. Clearly waiting for the market to rebound is not that great of a choice, as this is mostly subject and driven by emotions rather than logic.
I think a lot of people have this issue. Some may have a lump sum from a settlement or may have just received a payout from a pension upon retirement. Others may simply be nervous and have decided to stop their automatic investments and instead pile up cash until things settle down in the markets (however that’s judged).
I have no issue or worry investing smaller amounts regularly, but when it comes to investing a lump sum, even if it’s only a “large” amount to me, I start to get nervous.
I welcome your feedback and recommendations on what you would do. My ideas include:
- finish it now. Stop trying to even remotely time the market. In 30 years when I need these funds it won’t make a bit of difference if I invest today or wait for a few months and then invest.
- spread out the investments monthly or quarterly for a year or two. This would be the dollar cost averaging method and should limit the risk of investing on a single day. Inevitably the market will drop the day after I make a large investment just to test my fortitude, so this could be a good choice.
- I could wait until the markets stabilize, but I would want to set some firm criteria for this rather than just relying on my emotions or intuition. I’m not sure what criteria would make fixed income investments a good choice at one point and less of a good choice at another.
- I could purchase fixed income investments directly (i.e. individual bonds) rather than through a mutual fund. This would reduce the interest rate risk if I was willing to hold the bonds to maturity. Since my lump sum isn’t very large (it’s just large to me), the transaction costs may make this a subpar choice. This could be through a CD ladder or bond ladder. Most of these funds will be in my 401k though, which makes purchasing CD’s and bonds directly more difficult.
- I could change my allocation target and purchase stocks, and then reallocate later in life. I could also do this and then use new investment funds to purchase fixed income securities, ultimately getting me back to my desired allocation over time.
Image Credit: pshutterbug
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