Back to the investing fundamentals

It’s starting to look a lot like autumn. Even at our headquarters in sunny La Jolla CA we see the signs of fall – both the tourist crowds and the marine haze are gone. Everywhere else we operate, autumn leaves are flying in the cooler winds of October and pumpkins are piling up. All this makes us think of two things: rebalancing and football.

Rebalancing season

Rebalancing your portfolio is something those who enjoy professional management of their investments, like GuidedIRA customers, never have to worry about. Everyone else needs to attend to this fundamental financial chore from time to time. One popular recommendation is to do so just once a year. Picking an anniversary, holiday, or the start of the new year makes it easy to remember. Many professionals prefer a quarterly schedule for a bit more fine-grained control. We do too, because there’s an automatic reminder: when you notice a season turning, it’s probably time to rebalance.

Rebalancing is one of the most important things you can do for your savings. It’s also pretty simple. Log in to your portfolio. Compare the amount that’s invested in each asset to the percentages in your original plan (you do have a plan, right? If not, start here.) Then “reset” your investments to match the plan, buying or selling as needed. That’s it.

Buy low, sell high

It may seem wrong to sell off the winners and double down on the losers. But what you’re really doing is following the oldest investment advice there is: buying low and selling high. In the long term, this can provide a substantial “rebalancing bonus“ beyond what your money would earn if you left it alone. At the same time, you’re putting your portfolio back to the level of risk you originally chose, which protects you from volatility.

While there are good reasons to rebalance, some others are not so good. If the markets just tanked, active investors might be scrambling, but you should sit tight until your next scheduled rebalancing comes along. It’s just too tempting to make changes that aren’t in line with your plan. Likewise if the indexes are hitting new highs. If a significant change in your life affects your financial needs, then you should consider changes – but to your whole plan, not just your portfolio.

Stick to the fundamentals

The key thing is to choose whatever schedule you like and stick to it. In the long run that makes your timing essentially random compared to the markets, and lets your plan do its job.

Speaking of schedules, we can’t help noticing that it’s also football weather. But even while battling in “beast mode” to dig his Seahawks out of a disappointing early season, Marshawn Lynch apparently is helping teammates make the most of their 401(k). If a superstar athlete makes time for the fundamentals of investing, so can you.


Image courtesy Woodleywonderworks via Creative Commons.