Rothschild and Portfolio Rebalancing… Learning from Legends

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“I never buy at the bottom and I always sell too soon.” 

This was Baron Nathan Rothschild’s advice when asked if making money in investing was very difficult. He replied it wasn’t; in fact, it was easy because of this strategy.

How could a British banker’s strategy from the 19th century possibly help us with our investments? In one word, rebalancing.

We have learned over the years that due to our behaviors, we tend to hurt our overall investment returns by pulling ALL of our money in and out of the markets, i.e. trying to time markets. We need to avoid this type of “strategy” in favor of rebalancing our investments as some of them do very well and some lose value.

A disciplined rebalancing strategy will force us to sell some our winners and buy some of our losers, selling high and buying low. The opposite of what we find most individual investors doing.

If you start with a 60% stock and 40% bond asset allocation and your stock portfolio gains 12% and your bond portfolio loses 10%, what does your overall portfolio look like? You now end up with 65% in stocks and 35% in bonds. Your portfolio naturally became riskier as your stocks outperformed bonds.

If you haven’t rebalanced your holdings in the past three to five years you may be shocked to learn how much of your portfolio has been allocated to stocks. This will leave you overly exposed to any volatility or market corrections and will likely cause you to make irrational decisions at the worst possible times.

Like the baron, we don’t need to perfectly time markets, and nobody really can consistently. We just want to avoid trying to pick bottoms and piling in at the top of markets.

If you haven’t reviewed and rebalanced your investment holdings for some time you should contact your CERTIFIED FINANCIAL PLANNER™ Practitioner.

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