It's a time honored tradition in the investment community to tell investors to "hang in there, you're a long-term investor". While there is an element of truth to this statement, it is not particularly comforting when markets are volatile in the short term environment. The consternation that investors feel when portfolios fluctuate is palpable.
It's the age-old dilemma that investors face; short or long-term thinking when investing a portfolio. Of course, the answer is both. With the market plummeting in September and bouncing back in October, it’s no wonder investors struggle with investment decisions. And now with Italy moving into the headlines, it’s easy to lose focus. Look at fluctuations in Apple , Amazon , and just about everything else.
It boggles the mind to watch the whipsaw; here’s how we invest based on current circumstances. You might find this helpful as you invest your portfolio.
Start with a long-term view focused on overall goals, comfort level, and willingness to tolerate fluctuation. Examines the future cash flow of positions and assign a target price to each of the assets you buy. It’s important that you set a target price for your positions.
You need a thematic view of the world (especially THIS world). Your tactical weightings should reflect our views of where the world economy and macro environment is headed. This may mean the overweight a certain region or adjusting the duration of fixed income assets. It may mean underweighting a particular sector or focus that you believe benefit from sector tailwinds. Focus these trend adjustments for a 3 to 5 year time horizon.
But this is not to say that the short-term should be ignored. Short-term judgments on assets when market anomalies occur that allow for the opportunity to capture opportunity.
For example, if a company misses earnings that you like and has a strong reaction downward in price, that can obviously provide a buying opportunity This is a short-term decision based on a short-term price movement; a trading play. This is not to say that you automatically buy more when assets have dropped in value; that's not the case. Likewise, if a position moves towards your target price, don’t be afraid to sell. Yes tax hurts, but profit is the game.
Lean in one direction rather than making black-and-white judgments. The market moves too fast and is too unpredictable in an age of excess emotion and fast trading computers to make all or nothing decisions. Lean and allocate towards your inclinations; overweight or underweight certain areas of the market or reduce/increase asset classes.
A combination of short and long-term strategy will give you the highest probability of success. It's a strategy that we believe provide the opportunity for growth as well as help you design a survivable portfolio allocation if conditions become uncertain.
Michael Yoshikami, Ph.D., CFP®, is CEO, Founder and Chairman of YCMNET's Investment Committee at YCMNET Advisors. Michael is a CNBC Contributor and appears regularly on the network. YCMNET is a San Francisco Bay Area-based independent money management firm that provides fee-based wealth management services to institutions and individuals around the world. Michael was named by Barron's as one of the Top 100 Independent Financial Advisors for 2009, 2010 and 2011.