This is why rebalancing is critical to your successNov 06, 2019
It isn’t fashionable to hold cash or liquid funds right now, especially given the historically low level of interest rates around the developed world.
And yet, cash is important.
Cash gives you a safety buffer, it’s uncorrelated with other assets such as equities, and it gives you optionality, allowing you to capitalise on great opportunities when they come around.
Charlie Munger has often recounted scenarios where the patient investor with cash to deploy ends up in a far superior position, simply by waiting for higher expected returns.
The concept of rebalancing isn’t necessarily complex; but it certainly isn’t widely understood.
And although conceptually simple, rebalancing is a powerful tool which effectively forces you to buy low and sell high, and to manage your risk through the cycles.
Here’s a short extract from our new book, due to hit Aussie bookstores in the new year:
Of course this is only intended to be a simple and stylised example.
But if you’re serious about not losing money, then take some time to think carefully about this, and run a few different scenarios if it helps you to grasp why rebalancing matters so much as a risk management tool.
And remember Bernard Baruch’s famous quote:
‘I made my money by selling too soon’.
You also need to consider the wide range of returns from markets.
If you get 3-year returns from your portfolio of 7%, 7%, and 7%…then, well, that’s great.
But the statistics prove that in the real world returns very rarely follow such a linear pattern.
And the sequence of returns can lead to wild swings in the value of a portfolio which isn’t regularly rebalanced (and the end result over time could be considerably worse for much longer than you might think).
I discussed this important concept a little further in the short video here
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