I’m a staunch believer that emotions and investing do not mix. The right approach is to determine an appropriate asset allocation for yourself, let the markets do what they will, and then rebalance your portfolio back to its target allocation at pre-determined intervals. I encourage most of my clients to rebalance on an annual basis.
However, many investors do not take this type of approach and, instead, let their emotions determine their asset allocation. When the going gets tough, they abandon their allocation to stocks and flee to safety. Then they wait until the waters are calm and a sharp recovery has taken place before getting back into stocks.
What’s the big deal? On average, investors are getting a 5% lower return on their stock mutual fund investments than the funds’ reported returns. This is mostly due to investors buying in and out of funds based on emotions.