Keasler: Re-evaluate strategy for portfolio once a year

Keasler: Re-evaluate strategy for portfolio once a year

April 21st, 2010 in Business Diary

Q The stock market has moved up significantly from the 2009 lows. Should I follow the herd or make any changes ?

A There's a theory on Wall Street that goes something like this: If you follow the crowd and buy the hot investment of the day, chances are you'll be scooping up shares when most others are about to sell. This natural "herd instinct" of buying when everyone is euphoric may mean you've entered the game too late and are buying at the wrong time.

Investors often jump in at the wrong time because they're worried about what others are doing instead of focusing on good old-fashioned fundamentals such as a company's earning potential and its management.

History continually shows us that when individuals choose investments without a prudent basis for doing so, they often wind up losing money that can take many years to recover. We saw this from 1998-2000, when investors drove the Nasdaq composite over 5,000 -- only to see it fall to less than 2,000 over the following year.

So, when should you change your asset allocation? It is important to maintain balance in your portfolio. Accordingly, you should reevaluate your allocation strategy at least once a year or when you experience a major life change such as marriage or the birth of a child. It is not always necessary to make a fundamental change to the allocation, but you need to make that evaluation on a regular basis.

Sometimes your portfolio might just need a tweak to rebalance assets that have either increased or declined in value. For example, a booming stock market may mean that the value of the stock portion of your portfolio exceeds your original allocation. If that occurs, you may want to consider selling some stocks to bring your portfolio back into line with your initial allocation. Rebalancing is a strategy that every investor should take advantage of as a way to ensure their portfolio reflects their current investing goals, time horizon and tolerance for risk. Further changes to your allocation also may be appropriate depending on your particular investing style.

Strategic investing -- Most investors take a strategic approach to asset allocation, meaning they have at least 10 years before they anticipate needing the money they are investing. Strategic

investors look at the long term and typically do not make frequent changes to their allocation model. A strategic investor would change the way his money is invested if there was a fundamental shift in the economy (recession) or if inflation began to outpace the earnings that his investments were generating.

Cyclical investing -- Because the economy is cyclical, meaning it moves in stages of prosperity and recession, some investors change the way they allocate their assets based on the cycle of the economy. This is called cyclical investing and it typically means that an investor will reallocate funds every three months to three years. A cyclical investor might invest heavily in stocks when the economy experiences growth and, conversely, would invest more dollars in bonds when the economy experiences a period of contraction.

Tactical investing -- The third type of investor looks at the short-term -- a period of one year or less. The tactical investor changes his portfolio based on trends in the market. A tactical approach to asset allocation isn't for everyone as it typically requires an investor to trade rather actively and sometimes trade with greater risk.

Each investor has unique goals for his money and a distinctive investment style. It is best to talk with your financial consultant about what kind of asset allocation would be right for you and how often you should redistribute your assets. Bear in mind that although allocations diversifies your assets, it does not protect against fluctuating markets and uncertain returns.

Get answers to financial questions on Wednesdays from our columnists who work in the financial services industry. Jeffery M. Keasler is a senior financial adviser with Wells Fargo Advisors Financial Network LLC, Burroughs-Keasler Wealth Management. Submit questions to his attention by writing to Business Editor John Vass Jr., Chattanooga Times Free Press, P.O. Box 1447, Chattanooga, TN 37401-1447, or by e-mailing him at