A Guide To Portfolio Diversification

Periodic portfolio checkups and rebalancing are important processes for individual investors. Ben Carlson wrote yesterday about Seven Strategies for Investing at Market Peaks. He avoids saying that the current market is “the” peak, but the title clearly captures the interest of investors with that suspicion. He lists seven different strategies, noting some pluses and minuses for each. Then he stops.

My mission is to go a step further, providing some criteria for making rebalancing choices.

Why now?

You can, of course, simply rebalance your portfolio to a preset allocation. Most people believe that they might try to do a little better, depending upon current market conditions. Is it really a market peak, for example?

There is some irony in the current interest in reviewing portfolio balance. When the market was registering big losses, many people did not even read their statements. The news was probably bad. They would do better by waiting out the decline. With the market hitting new highs, there is greater interest. “How am I doing? Is my account also at a record?”

Investors who have safe and sensible allocations are now wondering why they were not more aggressive. How easy this is to see after the fact! The long, gradual rally, without significant corrections, may have instilled a false sense of potential risks.

Picking Winners is a Key to a Successful Rebalance

This may seem obvious, so let me explain a bit. We all love winners. Two of my friends are experts at thoroughbred handicapping. Both made a six-figure income for many years, even after the 17% rake from the track. Did they have a secret?

Not really. It was what equity investors would recognize as risk/reward. The popular horse often had enough action that the odds were unfavorable. Complete losers should be ignored. Their strategy was to shop the market of contenders seeking good prices. They did not expect miracles of consistency. Any horse could have a “bad trip” or a bad day. You analyzed the fundamental ratings for each horse. You developed a range of possible outcomes. And from that, you looked for significant edge – what horse “investors” call an overlay.

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The Stock Exchange does not have all the answers, but it provides good ideas and a stimulus for your own trading.

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