Thinking of Switching Up Your Investments?
Key Takeaways
After experiencing losses, there’s often an urge to make changes to your investments and what you’re allocated to.
Emotionally, it’s understandable, but making changes after the drawdown is like buying an umbrella for a storm that has passed.
Make adjustments only if there’s a need to. i.e. to increase diversification, or cater to new phases in life e.g. retirement.
Switching around in an attempt to chase performance usually ends up poorly.
If you were invested in practically anything other than commodities or cash in 2022, you would have likely experienced losses in your portfolio. When reviewing what did well and what didn’t, this may have you feeling like it’s time to make changes to your investments and what you’re allocating to.
But changes can go one of two ways, so the question is: How confident are you that your new allocation would reap benefits? Would you have guessed that for the time being, European stocks are at the top of the pile? Wasn’t Europe slated to head into a bad recession fuelled by the energy crisis borne out of the Ukraine war? How investments will perform over the short term is very hard to predict. However, we have a better understanding of the risk and return of the broad stock and bond asset classes over a longer time frame.
Reallocating to investments which have done well (such as commodities) and assuming that its performance continues would have caused you to miss out on the gains in equities globally. We have previously highlighted about missing the best days in the markets and how just losing out on those few days can be disastrous for your portfolio’s long term performance.
Investor and author Ben Carlson had a good article showing how investors crowd into investments that have done well in the past only to experience disappointment in the future. This is a tale as old as time itself. Making changes after the drawdown is like buying an umbrella for a storm that has passed. It might save you from future downpours but not the very one you just experienced.
So switch your investments only when there is a real need to — for example if you are contemplating retirement or have an upcoming need for income to be generated from your portfolio. Don’t switch around in an attempt to chase performance; it usually ends up poorly.
In the same way that you would not attempt a high risk activity such as sky-diving without professional supervision, investors can benefit greatly by relying on an adviser — having the peace of mind knowing that their plan is in the hands of a professional.
If any of the points speak to you and you would like to have a exploratory discussion, click here to schedule a chat with us. (Our 30-minute exploratory meeting is complimentary - either Zoom or In-Person)