After the stock market decline, I’m thinking it’s a good time to buy stocks. I have a 401(k) and an IRA and they’re about 65% in stocks now. Should I just increase the allocation since I think things will go up eventually?
— Investor
A. Here’s another time when investors would love to have a crystal ball.
Your general statement that stocks are a better buy at lower prices than higher prices is right, but no one can predict which way stocks will go in the short term.
It could fall further before going back up, said Deva Panambur, a fee-only planner with Sarsi, LLC in West New York.
Assuming you are invested in a diversified portfolio — which is the recommended way to invest — your allocation between various asset classes should depend on your objectives and risk profile and will require some planning, he said.
Two objectives that people usually have from portfolios are cash flow or income and growth, he said.
“Income-producing asset classes usually have lower long-term growth and vice versa, and you will need to have a suitable mixture of the two,” he said. “Keep in mind you can also get part of your income requirement from capital gains, such as the sale of appreciated assets, which could help you in the long run with better growth.”
You also have to consider your risk profile which Panambur said has two parts: your ability and your willingness to take risks.
Your ability to take risk depends on factors such as age, income and cash flow, while your willingness to take risk involves how you react to risk which, in a diversified portfolio is the volatility of asset prices, he said.
If you’re not sure how to proceed, consider setting up a consultation with a financial planner who can review your portfolio and your goals before advising what to do next.