The idea that one should re-plan one’s investments in response to market conditions is built deeply into the received wisdom about how money is to be managed. So much so that most of us assume that reacting to, or anticipating the various investment markets is all there is to investing. The stock markets fell sharply last week, how shall I react? The commodities bull-run has come to a jarring halt, how shall I react? And so on.
While this may be true for those who are active traders, this is generally misleading advice for those who save and invest. Invariably, the right triggers for re-planning your investments would be any change in the circumstances of your lives, rather than anything in the external world. On the scale of information which should cause you to rethink investments, a report that reveals high cholesterol in your bloodstream should rate well above a report that reveals bad news about a company making cholesterol-lowering drugs.
Even when it does pay attention to individual needs, the standard wisdom about investment planning invariably falls victim to stereotypes. You are a senior citizen? Then equity is not for you. Regardless of the fact that you may need money only to bequeath to your grandchildren, or that your nest-egg will have to fight inflation for another two or three decades and can’t really do without the equity boost. In sharp contrast, an investor in his thirties could easily need to stay away from riskier equities if he has some expensive family obligation looming.
Thumb-rules are just thumb-rules. They are good starting points but that’s all they are. Unless your own circumstances are exactly identical to the stereotype that the thumb-rule is based on, its unlikely to make for an actual recipe of actions that are suitable.