5. Rebalance as needed (huh?) … Don’t worry I’ll explain :-)

Rebalancing your portfolio means buying and selling shares to bring the asset allocation percentages back in line with the model portfolio you are following. It’s that simple. There are basically two big money-makers (or money savers) that we can put to work for us using this approach.

    1. As the market fluctuates, some assets classes may rise while others fall.  Most of the time, there is a lot of this “back and forth” movement which can make us money, depending on how much it costs us to trade a low number of shares. That’s why the clients of my firm use discount brokers, and why I recommend you do as well. Keep the transaction costs low enough that you can benefit from the weekly or monthly market fluctuations. If any high net worth or high income readers want to discuss the tax implications of this approach, feel free to contact me.
    2. As different asset classes come into favor, become the hot performers (think stocks in 1998-1999, or gold in 2009-2010), and then lose their luster, people who do not have an investment plan or discipline get sucked into the losers game of chasing what has done well for the last 4-5 years… over and over. Our model portfolios adjust the target allocations to the different asset classes, like stocks, bonds, real assets and cash, based on mathematical equations I developed. My algorithms take a look at the behavior of each asset class and of the whole portfolio, and reduce risk when the market begins to stampede. This forces us to manage risk (avoid big losses), buy low and sell high, which how money is made in the long run.

Personal Observation: So much research has shown that almost all stock pickers, portfolio managers, mutual fund pickers, or even separate account management pickers, fail to consistently out-perform their target indexes after all the costs paid by the customer. No matter how great a stock picker is… when all stocks are going down, her picks probably will also. If you have too much allocated to stocks, whatever the reason, your portfolio will take a big hit, and you may have to completely change your retirement plans. The key to portfolio management, in my experience, is in the asset allocation decision… not the stock picking decision.

How often do we rebalance?  Good question. The answer is “When appropriate”. Most people tell you to rebalance quarterly or annually. However, I recommend rebalancing when an asset class is off-target by more than, say, 0.5%. Most of the time, rebalancing monthly can work very well, but in volatile times, it makes sense to rebalance more often.

I plan to post model portfolio numbers at the end of the week every one to four weeks or so. You can decide, based on your own portfolio and your own trading costs, when you should rebalance. My theoretical backtests are based on weekly rebalancing, but don’t include estimates for trading costs and taxes. The disclaimers are listed with the backtest results, for your review.