To Rebalance or Not Rebalance.

Investors have learned a lesson during the 2008 financial crisis. Unfortunately, the lesson they learned was destructive to their financial future. Investors have learned to avoid equities because of a risk of loss. While this may seem like the comfortable or safe approach it will become detrimental to their goals.

English: 60 Wall Street
English: 60 Wall Street (Photo credit: Wikipedia)

Most investors have become victims of the Wall Street bullies and try to time the market or invest only in the ‘hot’ sectors. This mistake continues to be repeated. In the mid to late 90’s investors wanted nothing but large U.S. growth stocks. The results during the subsequent tech bubble crash were devastating to their portfolios.

Then came the 2000’s and investors were heavily into stocks regardless of their age. The resulting housing bubble crash was even more devastating causing many investors to leave the equity markets. The remaining investors in equities appear to be again falling victim to the Wall Street bullies. Studies have shown that the proportion of equities in the average account balance is greater than the proportion of 2008. Remember a correction can happen at any time.

The Main Street solution for investors is to own a broad globally diversified portfolio at an appropriate risk level.

This has proven to be a very difficult concept to many investors to implement except for those working with an investor coach. I have talked with investors who believe they can make their own asset allocation without the aid of an investor coach. In most if not all cases this has proven to be unsuccessful. Their emotions begin to lead them down the Wall Street bullies path.

These well intended decisions will lead to a poor performing portfolio.

Emotions are most investors worst enemy because the Wall Street bullies will continually feed their fears. Without the help of an investor coach you will begin gambling and speculating with your money.  The clear signs of gambling and speculating are:

  • Stock picking
  • Market timing
  • Track record investing

Perhaps the most difficult task for investors to complete is rebalancing their portfolio to the original allocations. Rebalancing involves selling the better performing asset classes and buying the poor performing asset classes. Imagine it’s March 2009 the Dow Jones Industrial has dropped from the October 2007 high of 14066 to 6530. Then imagine selling positive performing government bonds and buying stocks. Yes, buying stocks.

This is what you needed to do. You must ask yourself the question…Would you be capable of buying stocks when the Wall Street bullies are predicting the end? It might be easy to say yes now because you now know what happened.  But without the help of an investor coach most if not all of you would freeze or perhaps worse sell your stocks and lock in your losses. Your coach would remind you that the free markets do work and patience is rewarded.

Rebalancing sounds like an easy concept but the practice can prove very difficult at times.

Remember you don’t need to know everything about investing but you do need to know the right things.

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