Indexfundfan\’s blog (new URL is Indextown.com)

June 26, 2006

Acid test for investors

Filed under: Investing — indexfundfan @ 12:58 pm

The recent ‘small’ correction in the equities market is a good acid test on the suitability of an investor’s investment plan. Which of the following options did you take in June?

  • a) I have trouble sleeping and cannot stand my portfolio’s volatility. I sold out all my equity funds for cash. Being able to sleep is more important to me and I consider the loss a small price to pay for my lesson.
  • b) I am very excited with the sale in the equities market and invested a lot more! My original equity to fixed income target was 70% : 30%. Now it has become 75% : 25%.
  • c) I stuck to my plan. I re-balanced out of fixed income to equity but only to the extend as to keep my equity to fixed income ratio consistent with my investment plan.

If you choose a), it is a sign that your original investment plan was way too aggressive, and if you have chosen b), you probably have a risk appetite that is greater than what you have chosen for your original investment plan (rare case I would say).

But, if you have stuck to your plan, I would say congratulations to you for a well-formulated investment plan and good financial discipline!

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