Re-balancing – ugh!

We think she needs to re-balance!

One of the buzz words in investment advisers’ world IFO tires of hearing is “re-balancing.”

And to return to an old rant, IFO also doesn’t like the idea that you should invest in mutual funds because they are run by experts who know more than you do; are safer or less risky than you would be investing in individual stocks; and need less attention by you, the investor.

Today, we heard a mutual fund adviser recommending “re-balancing.” He means selling all or part of one or more of your mutual funds in favor in buying others with a different “risk profile” or “different sector” – say, sell a large cap fund, buy an emerging market fund.

What he advises you to do is decide what types of mutual funds you want and what proportions you want to have. Say, 25% each in of four different funds. At the end of the year, you may have 40%, 15%, 25% and 20% in those funds due to changes in their prices. So you are supposed to sell the winner that is up to 40% of your portfolio and add to the funds that made up 15% and 20% of the portfolio. That’s trading.

Just remember, every sale will cost a trading fee, plus a federal tax on whatever capital gain you may have made on it, if it isn’t a tax-free bond fund. You also have your regular fund management fees. That adds up.

But it’s not just mutual fund boosters who push re-balancing though. Regular stock brokers do, too. Say you and your broker decide a good asset allocation is some combination of stocks, bonds, cash and maybe some other assets like real estate or precious metals, or commodities.

Frankly, my dear, if you are reading this blog for advice on how to get started in investing and you are over 60 years old, you don’t want to be involved in any of the assets listed above except individual stocks.

There’s just not enough time or energy left in your life to learn enough for you to feel comfortable investing in them. If you started out in real estate, you already know what you need to do to protect your net worth. Same thing, if you started out in commodities.

And as you know IFO doesn’t like you to depend on advice from others.

But back to the asset allocation discussion. Again, if at the end of the year some of those assets have risen or fallen mightily, you will need to do some buying and selling to get the allocations back into sync with the chosen model. That’s trading, not investing.

Remember, you are the only person who has your own best interests at heart. The others may like you, they may even love you, but they don’t really have a vested interest in your personal financial success. You do.

Investment lesson: Look at the right hand column here under the label: Wisdom. Remember this always:

The really rich have wealth that lies very still through generations.


About InvestingforOne

I've been investing in various assets by myself using a discount broker for many years. Over that time, I've developed some theories that others might find useful. Plus, there is more to investing than money. Time, talent, work, friends, family all go into developing a good and satisfactory strategy.
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