The Four Pillars of Investing: Lessons for Building a Winning Portfolio by William J. Bernstein

Author:William J. Bernstein [Bernstein, William J.]
Language: eng
Format: epub, azw3, mobi
Tags: Finance, Business & Economics, Personal Finance, Investments & Securities, Investment Analysis, Investing, Investments, Portfolio management, Asset allocation
ISBN: 9780071385299
Publisher: McGraw-Hill Professional
Published: 2002-04-26T04:00:00+00:00

How to Handle the Panic

What is the investor to do during the inevitable crashes that characterize the capital markets? At a minimum, you should not panic and sell out—simply stand pat. You should have a firm asset allocation policy in place. What separates the professional from the amateur are two things: First, the knowledge that brutal bear markets are a fact of life and that there is no way to avoid their effects. And second, that when times get tough, the former stays the course; the latter abandons the blueprints, or, more often than not, has no blueprints at all.

In the book’s last section, we’ll talk about portfolio rebalancing—the process of maintaining a constant allocation; this is a technique which automatically commands you to sell when the market is euphoric and prices are high, and to buy when the market is morose and prices are low.

Ideally, when prices fall dramatically, you should go even further and actually increase your percentage equity allocation, which would require buying yet more stocks. This requires nerves of steel and runs the risk that you may exhaust your cash long before the market finally touches bottom. I don’t recommend this course of action to all but the hardiest and experienced of souls. If you decide to go this route, you should increase your stock allocation only by very small amounts—say by 5% after a fall of 25% in prices—so as to avoid running out of cash and risking complete demoralization in the event of a 1930s-style bear market.

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