June 8, 2020
Everyone knows that under perfect circumstances, investing in the stock market by seeking opportunities to buy low and sell high is ideal. However, as I have discussed in previous articles, not only is the challenge of timing the market almost impossible to do so reliably, but most investors are emotional investors, and so lack the discipline to buy low. Instead, I have counseled patience and nurturing. One strategy that can consistently nurture your investments is periodic re-balancing.
We have a giant chart in our office to remind us of the essential reality of the stock market. The chart is color coded, and shows the best and worst-performing asset classes each year, for the last 20 years. What is remarkable, is that there has been no consistency. The chart appears to be a crazy quilt of random colors, because there are no clear or reliable patterns of winners to recognize or follow. Some years, Emerging Markets are the best performers, while other years, they are at the bottom. The same is true for the bond market. The only consistency is the inconsistency of performance by asset class. Large, Mid and Small-sized companies have taken turns randomly outperforming each other over the years.
So, because we recognize that almost every asset class spends time at the bottom and other times at the top, I see an opportunity for nurturing our investments. How? By buying a particular asset class when it is at the bottom and waiting for it to recover and spend some time at the top of the chart. Unfortunately, very few people want to follow this strategy voluntarily as it is very difficult to buy low. In fact, most people tend to do the exact opposite. By doing what I call, “chasing the hot dot,” they often end up buying high and selling low!
So, I recommend following a strategy of “buying low and selling high” in a disciplined and regular fashion with only part of your portfolio, on a regular basis. This seems manageable for most investors.
Basically, we sell a small portion of our portfolio winners (sell high) and use that money to buy a similar portion of the losers in our portfolio (buy low).
Here is a simple example:
- Our target allocation is 50% XYZ fund and 50% ABC fund.
- After six months, XYZ has gone up and now represents 55% of our portfolio, while ABC has gone down and now represents 45% of the total portfolio.
- We decide to re-balance and bring the current allocation back to the target allocation of 50/50.
- We sell 5% of XYZ and buy 5% of ABC.
- We have now sold a little high and bought a little low.
This does not mean that there will be an instant positive result. It may take years for the low investment to move towards the top of the chart. If and when it does, we will be happy that we took advantage of the opportunity to buy low.
As I have mentioned before, when people plant baby trees, they know it will take many, many years for their trees to attain full height. Investing in stocks is no different. It is a long-term project that requires patience, discipline and nurturing to be successful.
Regular re-balancing can help us on this journey.
As always, if you have any questions or concerns, please call me.
Kevin Ellman
CEO, CFP® Wealth Preservation Solutions
Personal Family Office / 360 Wealth Management