Rebalancing

I got my year end 401(k) statement this last week. Hoo boy! Was that ever depressing to look at – most of the stock mutual funds were down anywhere from 30 to 40 percent for the year. One fund alone, in which I have nearly ten percent of my holdings, was down 48%. FORTY EIGHT PERCENT! Just about cut in half, in twelve short months.

And yet, this is the time of opportunity. It is truly amazing to me how one’s fear or greed about the market makes one act almost exactly contrary to what one should actually do. Let’s give a real world example: I am buying a pair of tennis shoes. Lo and behold – my favorite brand is having a sale; if I buy two pairs, I get the second at half price. Now, my feet aren’t exactly going to change sizes anymore and I have no problems with having an extra shoe box in a closet for a half year or so. The same thing goes for groceries. If there is something you buy regularly on sale, you buy more of it. THIS IS SMART ECONOMIC BEHAVIOR. No one has to tell you the correct thing to do.

So let’s go back to this smart shopper when they open up this year’s IRA or 401(k) statements (if they open them at all). A quick scan shows the 30%, 40%, nearly 50% drop in their stock funds, and the first reaction is I NEED TO TRANSFER FROM STOCK TO BONDS, OR EVEN TO CASH. I have the exact opposite reaction. Stock funds are on sale!

Now, I am probably the lone voice in the wilderness when it comes to asset allocation within your 401(k). And if you are very close to retirement, or have to take a distribution within the next couple years, the following may not apply to you. But if you still have at least five years until you are going to start taking any money out, this will likely boost your eventual gains by a percentage point or two.

My preferred allocation would be 100% into stock. My lone bond fund is 15% and the remainder is spread between various stock funds (concentrated in small or mid caps, and international. If there are multiple choices of the same general type, I will go with the one with lower fees unless the 10 year returns differ significantly). And my 15% concession to bonds is precisely for times like these.

It is time to rebalance. For me, I do not need a precise recalibration where I move $2,197.31 from small cap X to mid cap Y and $948.28 from international A to high yield bond B so I end up, for one glorious day, with EXACTLY 7%, 8%, 10%, 10%, 15%, 15%, 15%, and 20% within my carefully selected list of funds. Come on – one day later those percentages will be off again.
Instead, I will take about half of my bond fund holdings and move it, about 25% each, into my small, mid, large, and international stock funds. Done! In about 6 months, if the market is still underperforming, then I will do the same thing again, with about 2/3 of whatever is in the bond fund at that time.

I am not a big advocate of rebalancing on any particular kind of schedule. But when there is the overall general fear and loathing of the stock market that we are experiencing today, it is time to buy some stock funds on sale. (And when, in four or five years, your grocery bagger is giving you a stock tip because EVERYONE is excited about the market going up forever, you may want to move 5% of your stock holdings into bonds)

PLEASE do me a favor

... and vote for Deep Capture as the best business blog of 2008.

http://2008.weblogawards.org/polls/best-business-blog/

You can vote once a day until Friday.

The regular media has pretty much blacklisted Deep Capture mentions -- and yet .. each time we learn more about the stock market's failing, it seems a Deep Capture chapter has pointed it out a year or more in advance.

Thank you!
Trond

Short selling ban falls a little ... short

How interesting!

This makes the case that while the SEC “banned” short selling on 700+ financial institutions last fall, 7 BILLION shares were in fact sold short.

Hmmm… remind me again of what we're paying the SEC for? And chairman Cox now claims the ban was the lowlight of his career. I wonder how many millions he'll make lobbying for a hedge fund when he is replaced by the incoming Obama.

http://www.deepcapture.com/940-million-holes-in-the-wall-whither-short-sale-ban/

Regards,
Trond