No news was good news for investors last week. Each of the three most widely followed stock indexes – the Dow Industrials, the S&P 500, and the NASDAQ Composite – reached record territory. Nothing seemed to phase investors – not the impeachment inquiry, the trade tariff tiff, deepening unrest in Hong Kong, the Fed standing pat on interest rate hikes, the aging, if not aged bull market, etc., etc. True, if any of these myriad worries comes to fruition, the pain on Wall Street could be considerable. On the other hand, those who conclude that a steep reversal is imminent and change direction with their investments are taking a big risk. Just ask anybody who did so right after the Trump election or, for that matter, at the beginning of this year.
This week, there are several reports on the status of the real estate market and manufacturing activity. Otherwise, another quiet week as the holiday season fast approaches.
Studies of how individual investors fare find that most consistently earn returns well below the index averages for similarly diversified portfolios. This underperformance is largely attributable to poor investment timing. Rather than setting a diversification target and sticking to it, individual investors (and all too often, their investment advisors) tend to move out of stocks or bonds amidst or after a decline and move into stocks or bonds after prices rise – the classic “buy high, sell low” syndrome. No one likes to lose money and no one likes to sit on the sidelines or be in the “wrong” market sector when the investment markets are on the rise. But by establishing appropriate diversification targets and then adhering to the plan, investors can avoid untimely transactions that lead to investment mediocrity.
Periodic portfolio rebalancing can automatically make propitious changes in the holdings. Rebalancing works well simply because it prevents the temptation to chase hot market sectors (greed) and move out of sectors that are declining (fear). Rebalancing typically moves money out of investment categories that have recently risen and into investment categories that have recently declined – a sensible, yet counterintuitive move. Also, rebalancing rarely involves a significant amount of money. Rather, small amounts are shifted with each rebalancing, thereby preventing the usually inauspicious temptation to move too much money into or out of a particular market sector.
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