I often see this or similar questions posted on popular online investing and personal finance forums.
“The stock market has gone up (or down) a lot lately. What should I do now?” or “International stocks have not done much in the last 10 years. What should I do with them?” or "Is the recession coming? If so, what should I do?".
In most cases, the right answer to such questions may be “Do nothing”.
When such a question comes up in your mind, you do not need to rush to action based on a guess, a hunch or friend’s or expert’s recommendation. Take a deep breath and follow these steps to make your own rules-based decision, knowing that this strategy has always worked for long-term investors.
Step 1: Determine your Target Asset Allocation
Hopefully, you have already completed this step before starting your investing journey. If you have not, see the following post for details:
Using Vanguard Investor Questionnaire to determine your asset allocation
Note that this is an important prerequisite for this strategy to work.
Step 2: Determine your current Asset Allocation
If you have your accounts at Vanguard, you can use their Portfolio Watch tool to see your current asset allocation. The following post explains the Portfolio Watch tool in some detail:
Using Vanguard’s Portfolio Watch and Portfolio Tester for Rebalancing
Be sure to include your external (non-Vanguard) accounts in the Portfolio Watch as well. The above post explains how to do this.
Step 3: Rebalance (if necessary)
Lastly, if your actual allocation differs from your target allocation significantly (say, by 5 percentage points), it may be time to rebalance. Again, if you have your accounts at Vanguard, you can use their Portfolio Tester tool to help with rebalancing. The post mentioned in the Step 2 above explains how to use the Portfolio Tester tool.
If you find that there is no significant difference between your target and actual allocations, no action is necessary. However, if the difference between them makes you uncomfortable, it is time to rebalance for peace of mind.
Related:
Improve Long-term After-tax Return on 3-fund Portfolio using Asset Location
3 ways to take advantage of a market decline
Disclaimer: This article is not intended to be investment advice. Consult a duly licensed professional for investment advice. The contents of this article are for educational purposes only and do not constitute financial, accounting, tax, or legal advice. Past performance is no guarantee of future results.
