How Asset Allocation Protects You From Yourself
I wrote yesterday about being a long-term investor - having a 10+ year time horizon. Yet if you look back through your own stock portfolio, how many positions do you have that you owned 5 years ago? (In my case, the answer is none; I have a few names that I had back then but the shares are not the same lots. 10 years isn't valid in my case because I didn't own any stocks then.)
Here's the trick that I've learned to stop myself trading away a position because of a dip like today's. I have decided that a certain part of my investables are going to be positioned in stocks, equity in companies. When I trade dollars for equities I stop looking at the dollar measurement of those shares' bids and asks as the measure of their value; the value is the intrinsic worth of the shares themselves. This is an important trick because that worth, if properly determined, changes little over time compared to the stock price. That way, if I decide I am 80% in equities, and equities lose 10% of their value, I do not have to buy more equities to keep my allocation constant; the worth of my equities is unchanged.
The other, more important part of the trick is this: I have decided that that part of my portfolio, regardless of today's cash value, is going to be allocated to stocks. A value investor whose name I have forgotten (someone reading this probably knows) once was asked how he holds on to his positions when the price declines. He replied (paraphrased), "I have decided to be invested in equities, and therefore to participate in the all the price movements of equities. Why, therefore, wouldn't I want to hold such a position when the price movement is negative?"
The last part of the trick is this: you gotta stay steadfast to that conviction. If you don't, you are blood in the water and you will be eaten by a shark. Use whatever means you need to - quit looking at your portfolio; think about the dividends rolling in; just don't sell at a loss. That's easy in CAPS; maybe harder when it's real money, but infinitely more important.