For those of us who endured it, the stock market crash of October 19, 1987, and today’s 25th anniversary of that stomach-churning day should serve as compelling reminders about the importance of diversification and asset reallocation.
When the markets soar and seem to have no end in sight, a sharp reversal always is a possibility. To avoid losing all of your money, diversification and reallocation of your holdings are important steps to take.
You do not need to be a great investor such as Warren Buffett to follow these investing basics. The keys are setting aside the time to review your holdings on a periodic basis — once a year, for example — and actually following through by adjusting your portfolio accordingly.
This week’s earnings shortfalls by Google (GOOG) and Microsoft (MSFT) are two examples of why diversification and asset reallocation are worthwhile. Both companies have enjoyed tremendous growth and their share prices have risen commensurately in the past. However, technology stocks also have the potential to fall sharply, too.
Google and Microsoft are not the only technology stocks that are reporting results this week that are falling short of expectations.
“Intel (INTC) and Advanced Micro Devices (AMD) cut their respective outlooks because personal computer-related semiconductor demand is set to decline for the first time in a decade, given the secular shift toward smartphones and tablets,” Chris Versace, an investment analyst who writes the PowerTrend Profits newsletter, told me. “That was confirmed in Google’s earnings results when the company shared that more than 1.3 million Android-powered smartphones and tablets are being activated each day.”
One of my worst personal investment mistakes was to avoid reallocating when science and technology stocks were peaking a number of years ago. I enjoyed riding those stocks up and I also watched unhappily as they fell.
A good way to avoid huge losses is to set sell-stop orders on your holdings to help you trade out of such positions if the markets begin to plunge. Such stop loses allow you to limit your risk and either preserve a portion of your gains or avoid losing big money and thereby feeling compelled to hold onto your equities in hopes of recovering your losses when the tailspin ends and an anticipated recovery begins.
The monetary-easing and interest-rate reducing policies of central banks around the world this year have helped to keep the markets trend upward. The markets usually are driven by strengthening corporate revenues and profits, so caution is warranted when other factors propel equities ahead.
Long-term investors can absorb market pullbacks but such drops can be especially painful when a lack of diversification leaves you vulnerable to a major retreat by a single sector. For that reason, the 25th anniversary of the 1987 market crash recalls a drop of almost 23%, the largest one-day percentage-point plunge in history, and is a good reminder that investors never should forget to diversify and to reallocate their assets.