Keep Your Investment Appetite in Check
Everyone knows it’s ill-advised to go grocery shopping when you’re hungry. Your appetite in the moment is different than in normal circumstances, so you’re likely to buy foods you’ll never actually eat. I break this rule all the time, which is how I end up with four boxes of frozen mozzarella sticks.
Similar caution should apply when it comes to asset allocations in the wake of market downturns. When stocks decline, investors may be tempted to move into cash in order to avoid any further losses. That’s only natural, as the appetite for risk likely changes following the first drop. However, history tells us that’s probably the wrong move. A balanced asset allocation of 60% stocks and 40% bonds has on average outpaced cash in periods following three-month market declines. An investor sitting on the sideline might eventually turn nauseous at the missed opportunity from a market rebound.
Original Source: Dimensional Fund Advisors