The global financial markets have had a substantial pullback since the majority of British voters decided to leave the European Union. As an investor, it’s been no fun to look at your portfolio and watch your hard-earned savings fall so quickly.
Your mind is racing and you start wondering what, exactly, to do. Should you change your investment mix? Get out of foreign stocks and bonds? Try to buy on the dips? Ignore the noise and hope everything works out OK? If you are like many investors, these are some of the questions you are asking yourself right now.
So what should you do? Here are four things that every investor needs to consider:
1. Determine how much of your portfolio is at risk. Many people believe their portfolio has more risk in it than it actually has, and as a result, they wind up worrying for no reason. It can be a little difficult to determine how much of your portfolio is invested in stocks or foreign junk bonds by simply looking at a statement or online account balance.
For example, you may own an exchange-traded fund that is invested in conservative, short-term bonds. However, because the ETF trades on a stock exchange, it might be listed in your percentage of stocks within your account balance. Further, you may own a balanced fund that owns a variety of investments, so it’s challenging to know how much is in stocks simply by looking at your account holdings. Same thing holds true for target-date funds.
“When people are invested in foreign securities and the U.S. market is performing better, most investors don’t have the patience to wait out the market cycles.”
How can you tell how much of your account is in equities, foreign stocks, European bonds, etc.? There are two ways. First, you can use one of the many tools that are available online, such as Morningstar, and calculate the percentages yourself.
Or, if you work with an advisor, he or she should simply be able to provide you a detailed report. In fact, many advisory firms have tools that are linked to your account so that they can both calculate your correct allocations as well as illustrate how your account may react in the future.
I’ve found that just by going through this exercise, people have a greater understanding of what they actually own within their portfolio and oftentimes have much more safe assets than they believed beforehand.
2. Assess your cash needs. If you are in a position where you’ll need a chunk of cash within the next five years, make sure these dollars are not invested in stocks. For example, if you have a kid heading to college in the next year or two, you shouldn’t have tuition money bouncing around in stocks. Or if you are retired and taking income from your portfolio, you’ll want to make sure you have at least five years’ worth of income that is parked in more conservative investments.
3. Reduce foreign holdings. I realize that many financial professionals argue that it’s prudent to have a third or more of your portfolio invested in foreign securities, but I don’t think that’s always wise. The reason is this: When people are invested in foreign securities and the U.S. market is performing better, most investors don’t have the patience to wait out the market cycles. They’ll sell their foreign holdings, often at the wrong times.
Another reason to keep foreign securities at a smaller piece of your allocation — say, maybe 20 percent — is because of the currency markets. The dollar has rallied sharply the past few years, which has reduced the value of foreign securities. If you plan on moving to Europe, then having a bunch of investments denominated in European securities may make sense. But if you plan on staying in the United States, why load up on assets that have to be converted back to U.S. dollars?