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Archive for October, 2009

Need for Rebalancing

October 7th, 2009 at 12:51 pm

I thought I would follow up on a point I made yesterday concerning rebalancing. Everyone understands the reason for diversification and dollar cost averaging. Basically, don't put all your eggs in one basket and no one can market time.

Think of it this way. Over the past 2 years you had a top and bottom. The top occurred in October 2007 and the bottom occurred in March 2009. If you were out of the market from March 2009 to September 2009, you missed about a 37% return. If you had dollar averaged you would been buying all along the way. At the top, you would have been buying less shares in your mutual funds and the bottom you would have been buying more.

Now, I rebalance my portfolio twice a year – March and September. I could have picked once a year or and other 2 months in the year that are 6 months apart. I just like March and September.

With rebalancing, you need to have an allocation in mind. Let's say simply that you are 60% stock and 40% bond. In the above example as we approach September 2007, my allocations might be approaching 70% stocks and 30% bonds. The first thing to note is that my portfolio is riskier then my original allocation. In this case, I would sell my stock and buy bonds to get the allocation back to the original 60/40.

The second thing I am doing here is taking some profit and investing into my other asset classes. I am doing the opposite of chasing performance. I am buying into asset classes underperforming and selling the hot classes.

So, in March 2009, my portfolio might be 60% bonds and 40% stock. This portfolio is a lot more conservative then my original allocation. So, I sold the stock and bought bonds to get back to the 60/40 split. Last month, I rebalance where I sold so stocks and bought bonds because of the run up from March to September.

To illustrate my point about asset classes, I have attached the picture below. Noticed in 2002, the best performer was Lehman Agg (bond index) and the worst was Russell 2000 growth. And in 2003, Lehman Agg was the worst performer and the Russell 2000 was the best. By rebalancing in 2002, you would have been selling your Lehman Agg (your hot mutual fund) and purchasing Russell 2000.

The other great thing, much like dollar cost averaging, rebalancing on set dates takes the emotion out of your investments. It just something you do.


Goals Review - September

October 6th, 2009 at 01:47 pm

It's been awhile since I last updated in August. I am still updating my sidebar. I have maxed my 401 (k) contributions for the year.

I also rebalanced by portfolio. I do this twice a year (March and September). The theory is that I sell my winning sectors and asset class and purchase my under performing sectors. So in March, I reweighted my portfolio where I sold some bond funds and bought stock funds. In September, I sold some of the stock funds and bought some bond funds.

The easy way to achieve this is to buy a target fund that is close to the allocation you want.

I now used to my higher mortgage payments. It's nice to see over $1,300 going to mortgage as oppose to less then $500. I can see the balance going down and can envision it being paid off.

In February, I was asked (as well as all the consultants) to reduce my billable hours. It was a 20% decrease and I opted to take Mondays off. I was still living below my paycheck, but I knew that the larger financial goals were not going to be tackled. So, I have been generally in a holding pattern, taking a break, and enjoying the family.

Two weeks ago, we received word that we could go back to charging our normal hours. I actually increase my hours by 37%. So that coupled with the 401 (k) deductions being maxed, I have received a little boost in income.

Needless to say, it will all be going to furniture this month. But no new debt.

Also with this, I have found a new fire to start reviewing my other financial goals and start attacking them.