If you have a large investment in the stock market, you’re probably seeing recent instability as the value of some indexes has retarded more than 10% from their recent highs.
If you’re not worried about your portfolio, you don’t need to read this column. If you are worried, I hope the following will help:
Whenever there is a dramatic change in the value of an asset, it is normal to ask if you should make a major change to your portfolio. It’s a legitimate question, and the next four questions should help answer it.
The first two questions were proposed by Peter Lynch, former asset manager of the loyal Magellan Fund. He successfully became a well-known success in managing the fund and wrote a great bestselling book that explains how he did it.
The last two questions were suggested by Jason Zweig, a keen financial journalist with a reputation suitable for Wall Street Journal’s excellent financial advice column.
Question 1: What do you own and why do you own it?
Naturally, you should not make any major changes without first preparing a list of all assets in your portfolio, mutual funds, ETFs, money market funds, all common stocks, bonds, CDs and individual holdings in your savings account. We also list the values for each of these components as short-term dates. Also consider the reasons for the assignment you have now and the initial reason for the assignment.
For example, there may be a mixture of 60% of stocks (common stock), 30% of bonds, and 10% of conservative investments (money market funds, Ministry of Finance bills, CDs, savings accounts, etc.).
Compare the current value of each of these components with the first target. Consider the example above. If you initially wanted a portfolio of 60% with your stock, and if you find out your current share ratio is 65%, you can take steps to regain your original allocation plan. But you need to answer the remaining questions before you make that decision.
Question 2: Why do you own stocks?
That was a question Peter Lynch asked, but I think we should expand the question and ask why we first established the assignment. It is possible that they have chosen to establish a 60% share allocation for an annual profit of 10% (to date). This leads to Zweig’s third question.
Question 3. What has changed?
What has changed is President Trump’s approach to tariff use. The tariffs announced on April 2nd, and the next day were unprecedented in a substantial history of US history. Some of the tariffs are already pending, but at least temporarily, the effects of the trade war that Trump clearly launched have been negative for the US stock market, the US financial market and the dollar.
Obviously, no one knows how long it will take for the stock market to return to its previous level. In a recent article, Zweig showed that if they want to establish a constant income stream despite rising costs of living, they can move their inventory holdings to inflation-protected bonds.
Question 4: If you don’t already own a specific asset in your portfolio, would you buy it at this price?
Zweig suggests that we need to be aware of what behavioral economists call anchors: it’s not important, but rather a tendency to measure our profits and losses on a crisp reference point: the price you originally paid.
Zweig closes his article with the suggestion that “if you can’t answer four questions, there is no business to take dramatic action.” I agree.
My opinion: As long as President Trump continues to use tariffs as a weapon against his trading partners, the stock market will continue to be volatile. If you are retired or near that, I think it would be wise to consider reducing the shares in your portfolio if the stock market recovers. This protects the asset base. In this situation, consider increasing the proportion of conservative investments, such as money market instruments. This is what I did last year.
Elliot Raphaelson welcomes your questions and comments at rapelliot@gmail.com.
