Over the past couple of months, we’ve considered two of the four fundamental investment rules. These are general principles that should help you take the emotion out of investing and alleviate possible confusion. The first two investment principles are: determine your investor profile and allocate appropriately. Today, we’ll consider the third investment principle: re-allocate tactically.
To reallocate funds tactically is to maintain a balanced approach. If the market surges and one of your investments is suddenly doing well, do you ditch your other investments and throw everything you have in that one basket? This generally is not a wise plan for long-term growth. The principle of “buy low, sell high” is a good rule for managing your investments. This strategy manifests itself in a willingness to sell an asset that surges and reallocate money to funds that have not been performing as well to maintain the level of risk you are comfortable with.
This principle also means removing emotion from the decision-making process and not chasing investment returns. Trying to time the market correctly can leave an investor with minimal returns that do not meet long-term goals. Reallocating tactically is easy enough to say, but more difficult to put into practice.
Fear and Greed
There are two main enemies of the third investment principle: fear and greed. These two elements are active agitators against maintaining a steady investment course. Fear and greed thrive on emotion. The more emotion you let into your investment strategy, the stronger and more powerful a role fear and greed play in your life. Horror story after horror story can be found about individuals who succumbed to greed and chased get-rich-quick scheme after scheme. Like the Sirens of Homer’s The Odyssey, greed sounds so sweet, but will only bring financial ruin.
If fear and greed are your main financial advisors, it’s time to subtract them from the equation. For long-term success, it’s vital to reallocate funds tactically. For more on this topic, see our video on what it means to reallocate tactically.
Next, we will build on the last fundamental investment rule: do not go with the flow.