The impact of recent market volatility on our retirement portfolios has left us wondering whether we should do something about it. It is natural for us to become anxious when we see our portfolios lose double-digit percentage points. However, acting on such trends without a clearly defined strategy may not be the best thing to do.
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Most of us have limited investment options in our retirement accounts so we tend to follow simple allocation strategies such as 60/40(Stock/Bond) portfolio, Well diversified – certain percentage of contributions allocated to every investment vehicle available or a periodic rebalance strategy to maintain target weights of available asset classes.
Assuming that you have a clearly defined asset allocation and investment strategy appropriate to your goals, time horizon, risk appetite and other personal circumstances, it is almost always wise to stick to that strategy.Â
Some of the pitfalls I noticed while implementing overly active investment strategies in tax deferred and accounts with limited investment options are failing to precisely time the market and missing out on dollar cost averaging. While changing our allocation to stable funds when things look rough gives us a sense of safety in the short term, we more often don’t realize that we have locked in long term losses and also miss out on future gains if we cannot precisely time the bottom of the market.