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Rebalancing your portfolio is the key to success

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 30 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 rags 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.

Rebalancing works

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 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 requires 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 based on real asset class returns for over 20 years.  Here’s the tale of 4 brothers and their investment strategies

Brother 1 (systematic investing): 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 (chasing the winners)
: Chase always buys last year’s 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 (buying the loser): 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 (re-balancing the portfolio): Jake the rebalance. 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 its original mix.

20 years later

After 20 years, Jake, the rebalance, 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 a 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 the 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 a 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 discipline or framework to keep emotions from corroding that framework. I got that from Warren Buffet who seems to know what he is doing.


  1. Rob Bennett

    Stocks offer an outstanding long-term value proposition when purchased at low or moderate prices. Not surprisingly, they offer a horrible long-term value proposition when purchased at insanely high prices (like those that applied from 1996 through 2008). So the key to successful long-term investing is being willing to change your stock allocation in response to big price swings, to keep your risk level roughly constant.

    Rebalancers do not do this. They stay at the same stock allocation at all times.

    Rebalacing is the portfolio allocation strategy of Buy-and-Holders.


    • jimyih

      Thanks for the insights Rob, I don;t disagree with you except that the challenge most people face is the ability to determine when prices are high or low. It’s always easy in hindsight but never easy looking ahead. The problem is compounded by the impact of emotions in the decision making process.

      Also, Not all buy and hold investors rebalance.

  2. tsanko

    Wonderful ..thanks a lot for posting a good informitive blog

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