by Richard E. Reyes, CFP
Everyone has heard of a simple strategy “buy low/sell high” meaning sell equities when prices appreciate and buy them when their prices are low. Easy right? Anybody can do that. Well frankly, it is simple to understand, but harder to do when you’re caught up in the stress and excitement of investing.
This is why it is important to understand the concept of rebalancing which we incorporate automatically and unemotionally into every portfolio throughout the year and its one of the truths explained in our book. Let me explain this simple concept to you.
Once your portfolio is designed, you only need to maintain it as you would when you cook in a crock pot. At times, throughout the year your portfolio will become out of balance. Meaning that the target percentage for each asset class or rather your percentage of stocks vs. bonds has gotten out of target. Rebalancing takes the assets that outperform beyond their target i.e performed well and sells that portion of them off at a higher price, while at the same time reinvest those dollars into the asset classes that have underperformed and have shrunk to a small percentage of the whole, so you will actually be buying more of those.
Investors have a hard time doing the rebalancing – why? because it’s counterintuitive to buy what is not performing well and selling what is performing well. Which isn’t this exactly what “Buy Low/Sell High” is actually doing. And this is exactly why investors and portfolios fail because emotions get involved in the money decisions which lead investors to take on more risk and therefore lead them to lose money. As we have mentioned in the past – emotions lead many investors astray.
All investing involves risk and cost. A good investment strategy includes a disciplined design and rebalancing. Although no investment strategy can guarantee peace of mind, incredible gains or protect against loss, taking some simple steps will reward you over time.
If you are looking for a brief, plain-English introdution to investing, don’t forget to BUY my book, Dirty Filthy Lies My Broker Taught Me & 101 Truths to Money and Investing. Order my book now and I will also send you my Investor Awareness Guide and listen to our The Seven Deadly Investor Traps that Destroy Your Wealth and the Three Power Strategies to Fix Your Portfolio Fast! These materials will equip you with the information you need to begin putting your investment experience back on track.
Wealth and Business Planning Group, LLC (The Financial Quarterback™) is a Registered Investment Advisor in the State of Florida that provides Fee Planning and Asset Management. Depending on your state of residence, Wealth and Business Planning Group, LLC (The Financial Quarterback™) may not be able to immediately provide services. For more information go to www.thefinancialqb.com. Richard E. Reyes, CFP is an Investment Advisor and President of Wealth & Business Planning Group, LLC (The Financial Quarterback™).