3 Tips on How to Take a Stress-Free Holiday Break From Investing
Fortunately, you can protect yourself from some of the problems that could arise while you're taking that break from your investing regimen. Using a combination of the following ideas can help you go on vacation without being constantly worried about your investments.
1. Rebalance Your Portfolio
If you're not a short-term trader, then there's little reason for you to take dramatic action to change your investment strategy. But one thing to consider in light of the run-up in stocks during 2013 is rebalancing your portfolio.
Many investors are surprised at just how far out of balance an investment portfolio can get even in a short period of time. For instance, with the S&P 500 up almost 30 percent this year including dividends while a long-term bond fund tracking an index of Treasuries is down 13 percent, someone who started the year with a 50/50 split between stocks and bonds now has 60 percent of their money in stocks and only 40 percent in bonds. If that's riskier than you're comfortable with, rebalancing to get yourself back to 50/50 will lock in some of your stock gains and let you take advantage of lower bond prices in the process.
2. Look At Less-Volatile Investments
Whether you're looking at stocks, bonds, or other assets, some investments within a class will always be less volatile than others. With stocks, one measure of volatility is known as "beta" and generally measures how much you can expect a given stock to rise or fall in relation to broader market moves. A stock with a beta of 1 generally moves about the same amount as the overall market in percentage terms, while a beta of 2 indicates a stock that's twice as volatile and a beta of 0.5 signals half the volatility of the market.
%VIRTUAL-article-sponsoredlinks%You can find beta in most stock listings online. At DailyFinance, beta is listed on the Financial Ratios page of the stock quote. So for example, Procter & Gamble(PG) has a beta of 0.55, and many consumer-products stocks share similarly calm responses to market moves. By contrast, the financial sector has been highly volatile lately, with Bank of America (BAC) carrying a beta well above 2. If you find yourself with a large number of high-beta stocks in your portfolio, consider balancing them with lower-beta stocks. That could give you a smoother ride, especially while you're not paying close attention to your portfolio.
On the bond side of your investments, long-term bonds move much more sharply than short-term bonds. So if you have a lot of exposure to long bonds, replacing some of that exposure with shorter-term bonds can make your portfolio less vulnerable to unexpected interest-rate changes. You might sacrifice some income by going shorter, but that might be worth it to avoid unnecessary worry while you're having fun with family rather than keeping an eye on rates.
3. Consider Protection -- At a Price
Finally, there are certain measures you can take to protect yourself against unexpected declines in your investments. For stocks and exchange-traded funds, setting stop-loss orders can allow you to give instructions to your broker that will automatically sell them if they fall below a certain price. The goal is to set a maximum loss you're willing to endure and to protect yourself from even worse losses.
However, one problem with stop-loss orders is that if the stock immediately plunges far below your order price, you'll suffer greater losses than you expected. Even worse is that stop-loss-induced sales have often led to very-short-term stock-price plunges, -- declines that reverse themselves hours or even minutes later, leaving those whose stop-loss orders were executed with locked-in losses.
The alternative to stop-loss orders is to buy put options. These options give you the right to sell your shares at a given price over a certain time frame, and so if your stock falls below that price, you can exercise the option and guarantee yourself a minimum amount from the sale of your stock. Unlike stop-loss orders, though, you have to pay upfront for put options, and the amount you'll pay is high enough that you'll want to be careful to buy them in moderation -- and accept that you could lose the entire amount you pay for the option if your stock doesn't drop.
Be Smart About Your Portfolio
For the most part, long-term investors shouldn't be focused on short time periods at all, accepting that occasional short-term moves will present opportunities or challenges. But if you want to make sure you're not surprised by anything that might happen over the holidays, using these three strategies should give you the peace of mind you need to turn your smartphone's stock-tracker app off and focus on celebrating the season.
You can follow Motley Fool contributor Dan Caplinger on Twitter @DanCaplinger or on Google+. Dan owns warrants on Bank of America. The Motley Fool recommends Bank of America and Procter & Gamble. The Motley Fool owns shares of Bank of America.