Investing is a well-covered topic. Google the word investing and you get 286,000,000 results in 0.31 seconds. There is no shortage of information out there on investing.
As a financial expert, one of the most common questions I have gotten over the past 20 years is “What’s a good investment these days?” Over and over again, I would get asked this question. What’s the infatuation with picking investments? It’s simple, we think it is the key to success. All we have to do is find that one investment that will catapult us from rages to riches.
Is this really the key to success?
In my opinion, it’s half the key but not the whole key. Consider this to truly become successful in investing. To truly win at the investing game, you have to do two things, not one. This may come as a bit of a shock to you but to really win at the investment game, you must BUY LOW and SELL HIGH. Tough to dispute, right? We’ve all heard this before. This is not new. This is not innovative. But I will tell you this . . . it is the only way you are guaranteed to become successful in investing.
So now I am going to share with you a strategy that is guaranteed to make you successful – rebalancing. It’s so simple, it’s so common sense but it’s one of those things where common senses may not be too common.
Rebalancing is rebalancing is simply the process of realigning the weighting of a portfolio. Through rebalancing, you will always sell higher and buy lower. Although we know that buy low, sell high is supposed to be the best strategy to invest, it is also the hardest to implement because it require overcoming significant psychological barriers to chase investments that have done the best. Just think about it, when you look at your investment statement and you see the investments that are doing poorly versus the ones that are doing well, what is your first inclination? Is it to get rid of your losers and buy more of your winners? Success comes in doing the opposite and that takes discipline.
A tale of 4 brothers
I’ve been tracking 4 hypothetical portfolios for based on real asset class returns since 1990. That’s 20 years of data.
Brother 1: Sam the do it again man invests $10,000 per year and every year, he puts $2000 into cash, $2000 into Canadian Stocks, $2000 into global Stocks, $2000 into Bonds and $2000 into income trusts.
Brother 2: Chase always buys last years winners. He also invests $10,000 per year but instead of spreading the money out, he just puts the $10,000 into last years best performing asset class
Brother 3: Ernie the opposite. For all of his life, Ernie did the opposite of chase and it was no different when it came to investing. When Ernie invested his $10,000 per year, he always bought last year’s loser (the worst performing asset class). Ernie thought this was smart because he was practicing buy low
Brother 4: Jake the rebalancer. Jake took a different strategy than his 4 brothers. He used his $10,000 annual investment and used it to balance the portfolio back to the original mix – one fifth in each investment. Every year he would sell some of the winners to buy some of the losers to rebalance the portfolio to it’s original mix.
20 years later
After 20 years, Jake, the rebalancer, had the most money in the portfolio after investing $10,000 per year. His total accumulated amount was $471,794.67.
The next biggest portfolio belonged to Sam, the do it again man with $463,572.90.
I was surprised to see that Chase beat Ernie because the last time I checked on their progress, Ernie was well ahead of chase. Because of my research on chasing performance, I would have assumed that chasing performance is always the losing strategy. After looking at the numbers more closely, over the 20 years, Ernie was ahead of Chase for 16 of the 20 years so I still stand behind my belief that chasing performance has a very low probability of success.
My two cents
Rebalancing is strategy to manage your investment portfolio that helps you to buy low and sell high. Most people have difficulty with this because emotions get in the way and our guts often tell us to keep our winners and sell out losers. Rebalancing even beats buy and hold most of the time. Stop trying to time the markets and guess which investment might be the best. I’ve always said successful investing is about having the a discipline or framework to keep emotions from corroding that framework. I got that from Warren Buffet who seems to know what he is doing.