Today is the 15th of January, and it is my first post of 2020. I didn’t exactly plan not to blog until now, but to be honest, I didn’t have the mental bandwidth to concentrate on blogging until today (too much else going on). Also, I didn’t exactly have a 2020 blogging plan in place. That’s fine. For the time being, the plan is to just post when I want to. 🙂
I am currently reading an investment book called “Unconventional Success: A Fundamental Approach to Personal Investment,” by David Swensen. I don’t exactly need to read another investing book, but this book came highly recommended again and again, so I put it on my book list (and it arrived on Christmas thanks to my wife, along with many other books I asked for).
Swensen makes a lot of tried-and-true points about passive index fund investing. The ground he covers is quite familiar to me, yet I’m still benefiting from his point of view.
For instance, Swensen has some very cogent thoughts on rebalancing. In case you don’t know, rebalancing is the process of adjusting your investments to meet your desired asset allocation. Over time, left undisturbed, investment allocations will fluctuate. A portfolio that starts a year with 65% stocks could end it with 80% stocks if the market goes up a lot (as it did last year). Rebalancing is the act of returning the allocation of different asset classes to a pre-determined percentage.
As Swensen writes,
Rebalancing involves taking action to ensure that the current portfolio characteristics match as closely as is practicable the targeted portfolio allocations… To maintain desired allocations, investors sell assets that appreciate in relative terms and buy assets that depreciate in relative terms.“Unconventional Success,” p183
In other words, when you rebalance, you sell the assets that have grown until their relative amount equals what you pre-determined they should be. Meanwhile, you buy more of the assets that have fallen in relative amounts so that amount equals the pre-determined level as well. It’s about maintaining a steady proportion of different assets. You say, for example, “I always want 80% of my portfolio to be stocks.” In order to maintain this percentage, you will have to make periodic adjustments to the portfolio to make sure the percentage of stocks stays at that number.
It all sounds really simple. Yet in truth, rebalancing can be a test of mental fortitude. As Swensen continues,
Rebalancing requires behavior at odds with traditional thinking…Under extreme market conditions, rebalancers face a test of their mettle. Dramatic bear markets signal the need for significant purchases of losers, while extraordinary bull markets call for substantial sales of winners. When markets make radical moves, investors demonstrate either the courage or the cowardice of their convictions.“Unconventional Success,” p183
In other words, it can be dang hard to buy assets that have fallen from grace! While the media and your friends and neighbors are worried about the sky falling from the dramatic losses investors are incurring, you are beholden to your pre-set asset allocation. So you must buy those losers!
It can be equally challenging to sell those assets that have really done well. While the rest of the world is rejoicing at the ride up the hill with the flavor-of the-month, you are selling those winners in order to keep things in balance.
Yet in order to maintain a pre-set allocation of assets, that is what you must do from time to time. If you do not, you haven’t re-balanced.
This kind of thinking is at the heart of contrarian behavior, which many a good investor uses to succeed. This is not always easy to accomplish:
Contrarian behavior lies at the heart of most successful investment strategies. Unfortunately for investors, human natures craves the positive reinforcement that comes from running with the crowd… Contrarian investment behavior requires shunning the loved and embracing the unloved. Most people do the opposite.“Unconventional Success,” p184
I found myself eagerly taking this chapter in today as I read it. A few months ago I read several books about Sir John Templeton, considered one of the greatest investors of the 20th Century. He began as an investor during the Great Depression spending $10,000 of borrowed money to buy stocks of buying companies that were under $1. He did quite well from this contrarian move, and thus started his fortune.
While I have no pretense of accomplishing Templeton-level investing moves, reading about him made me interested in seeing how I can take the essence of the contrarian philosophy and use it to be a better investor.
It turns out, by simply rebalancing my portfolio, I am doing just that!
Here’s to the everyday investor simply using their head to make choices that are sensible, rational, and in the long-term, beneficial for their investments.