Step No. 1: Get your allocation down
Before you do anything else, figure out how much of your portfolio you want in stocks under “normal” conditions. If you’re young, it might be 80% or more. If you’re near or in retirement, it might be closer to 50%. Figure out what sounds right for you, and set that as your baseline. You don’t have to get there tomorrow. But, in my opinion, this at least gets you a road map.
Step No. 2: Average in
In my opinion, regret avoidance can be paralyzing. You don’t invest because you are afraid of buying at the top, losing money and probably worst of all, looking and feeling like an idiot. And then when the market goes up without you, you still end up looking and feeling like an idiot.
I struggle with these emotions, too. We all do. The best way, in my view, I have found to deal with them is to average into my positions over time. I make an initial purchase of 20% to 50% and then trickle into the rest of the position in even increments over the course of a few months.
It’s not particularly scientific of me, and I don’t claim that it is optimal. But it helps me manage my emotions and avoid regret.
Step No. 3: Take the win
In my opinion, it’s important to remember that you don’t have to be invested at all times. Like my basketball teammate, you can take the win, sell high and walk away for a while.
Of course, this gets us back to minimizing regrets. It’s painful to sit in cash and watch the market rip higher without you.
This is the beauty of rebalancing in my opinion. I rarely sell my entire portfolio and sit in cash. But I do regularly rebalance, selling off pieces of my winners and rotating the proceeds into bonds, cash or nonstock alternatives. That way I always have at least a little skin in the game, but I’m also taking profits along the way.Take the win!
Photo Credit: thenails via Flickr Creative Commons