Buy Low, Sell High

If you are like me, odds are you weren’t born into a blue-blood family, you didn’t make it rich right out of high school because you were a five-tool baseball player (can’t wait for the World Champion Texas Rangers to take the field!), and you didn’t sell some tech start-up unicorn for an obscene amount of money. You probably made your money the old-fashioned, Smith Barney way – you earned it!

Now here comes the challenge. Unless you plan to work until the day you die, you probably have thoughts of retirement or sending your kids off to college without either one of you racking up a ton of debt. So, you wizen up and decide to spend less than you make, and with those savings you invest.

Specifically, you do your research and figure out your goals. Once you take into account your timeline, you pick the right mixture of assets to invest in (hopefully you are using low-cost, broad-based index funds, but that is for another newsletter) and you pick the right mix (a.k.a. – percentage to invest in each asset) of funds to help you reach the Investing Promised Land.

Avast Ye Eyes on the Horizon, Me Maties!

In the dynamic world of investing, maintaining the right balance in your portfolio is akin to navigating a ship through turbulent waters. Just as a skilled captain adjusts a vessel’s sails to keep a vessel on course, investors must regularly rebalance their portfolios to stay aligned with their financial goals and market conditions. Rebalancing is not merely a chore; it is a strategic move with numerous benefits that can safeguard your investments and enhance long-term returns.

What is Rebalancing?

In short, rebalancing involves realigning the weightings of assets in your investment portfolio. Over time, market fluctuations can cause the value of different assets to change, leading to deviations from your original asset allocation. This practice entails selling assets that have grown disproportionately and reinvesting the proceeds into underperforming or less represented assets to restore the desired allocation. In essence, you are “buying low. and selling high” by moving funds from your winners to your losers. Let me demonstrate with an example.

Let’s assume the following table closely resembled one of my retirement accounts towards the end of February 2024. As you see in column A, my current investment goal is to hold about 60% of my portfolio in US stocks, 20% in international stocks, and the remaining 20% in US bonds. However, as you see in column C this portfolio was a bit out of alignment for several reasons (e.g., S&P 500 has been on a good run while foreign markets have not, rising interest rates has brought down bond prices, etc.).

So, in order to correct this imbalance, I just moved some money off my “winners” and allocated it to my “losers”. Nothing very complicated about this process. You just stick to your plan.

The Benefits of Rebalancing

• Risk Management: One of the primary benefits of rebalancing is risk management. Asset classes have different levels of risk and return potential. Rebalancing ensures that your portfolio remains diversified and aligned with your risk tolerance. By periodically adjusting the allocation, investors can mitigate the risk of overexposure to volatile assets, thus cushioning their portfolios against market downturns.As demonstrated in the previous table, the S&P 500 has been getting a bit hot. Some would argue that its overvalued and we are due for a correction.Maybe, maybe not.The point is that by keeping my portfolio in alignment with my goals, I can mitigate the risk of being too exposed to any one investment category.
• Maintaining Asset Allocation: This is a crucial determinant of investment success. Studies have shown that asset allocation explains the majority of portfolio returns. Rebalancing helps investors maintain their desired asset allocation, preventing drifts that may occur due to market movements. This disciplined approach ensures that your portfolio stays true to your investment objectives and tolerance for risk.As any decent financial planner or successful investor will tell you, investing for your retirement or your kid’s college fund is a marathon not a sprint. You have a long-term horizon to meet your objective. Chasing the latest investment fad or getting sucked into the daily “noise” of the business channels can sabotage your goals and objectives. Keeping things in balance helps you get to where you want to be.
• Enhanced Returns: While rebalancing may seem counterintuitive—selling assets that have performed well—it can lead to enhanced returns over the long term. Rebalancing involves selling high-performing assets and buying undervalued or underperforming ones. As we previously discussed, this contrarian approach allows investors to capitalize on market inefficiencies to “buy low" while “selling high”, potentially boosting returns over time.
• Discipline and Emotional Control: Emotions often cloud investment decisions, leading investors to chase hot sectors or panic during market downturns. Rebalancing instills discipline by imposing a systematic approach to buying and selling assets. It helps investors avoid making impulsive decisions driven by fear or greed, fostering a more rational and strategic investment mindset.One of the best investment-related quotes I ever heard came from Warren Buffett. In essence, he argues that when everyone is running out the door is when you should buy stocks. The reason is that when people allow fear to cloud their judgment, they can make decisions that can impact them negatively for a very long time. By sticking with your portfolio and adjusting as needed, you can remove emotions from the equation and let logic and analytics do the work.
• Adaptation to Changing Goals: Financial goals and circumstances evolve over time. Rebalancing enables investors to adapt their portfolios to changing objectives, time horizons, or risk tolerances. Whether you're nearing retirement, saving for a major expense, or adjusting to market conditions, rebalancing ensures that your portfolio remains aligned with your current needs and objectives.Harken back to how the markets looked at the depths of the Great Recession. Or when COVID was spreading like wildfire. Now, think about the markets today and the hype/hope around A.I. and how it will change our world (for the better I hope). The future is always in flux, and you can’t predict how things will shake out. Just know that over the long run, things tend to revert to the mean.
• Tax Efficiency: Rebalancing can also offer tax benefits. By selling appreciated assets in tax-advantaged accounts or offsetting gains with losses, investors can minimize tax liabilities. Additionally, strategic rebalancing can help optimize tax efficiency by taking advantage of tax-loss harvesting opportunities or capitalizing on favorable tax treatment for certain asset classes.

Implementing a Rebalancing Strategy

While the benefits of rebalancing are clear, the frequency and method of rebalancing can vary based on individual circumstances and preferences. Some investors adhere to a calendar-based approach, rebalancing their portfolios annually or semi-annually. Others opt for a threshold-based strategy, rebalancing whenever deviations from the target allocation exceed a predetermined threshold, typically around 5% to 10%.

Personally, I like to rebalance at the end of January or soon after. Specifically, at the end of each year mutual funds may have sizable distributions (e.g., dividends, short-term gains, long-term gains, etc.) that once they are sent to the investors can have a significant impact on prices.

As such, I like the dust to settle and for the institutional investors to no longer be worried about their year-end performance. So, it’s at the beginning of each calendar year that I look at my portfolio and make any adjustments needed. I will also look in early July as well. There is no point in trying to “time the market”. Just pick a point on the calendar and stick with it.

Furthermore, investors should consider transaction costs, tax implications, and the impact of rebalancing on portfolio performance. Implementing a rebalancing strategy requires careful consideration of these factors to ensure that the benefits outweigh the associated costs.

At the end of day, rebalancing your investment portfolio is not just a prudent financial practice; it is a cornerstone of successful investing. By systematically realigning your portfolio to maintain the desired asset allocation, investors can manage risk, enhance returns, and adapt to changing market conditions and financial goals. While rebalancing requires discipline and careful planning, the long-term benefits far outweigh the effort, positioning investors for financial success and peace of mind.

Et, al....

Review: Dune: Part Two

Roughly three years ago, the first "Dune" came out. I went to go see it by myself since my wife had no interest. When I came home, she asked me how it was. My response was something along the lines of "the cinematography was amazing". Which is code for the movie was not that good.

Now, if you go to Rotten Tomatoes, it got an 83% from the critics. I can't really argue with it since the special effects, costumes, cinematography, and sound was great. The problem was this...

It was a really LONG movie.

So now “Dune: Part Two” hits the screens, and it's truly a cinematic behemoth, a sequel that embraces its epic scale with unbridled ambition. Directed by Denis Villeneuve, this follow-up to the 2021 Oscar-winning film continues the saga of Paul Atreides on the desert planet Arrakis.

The word that best describes this film is “massive”—from its sprawling battles to its nuanced themes about power and fanaticism. Villeneuve, along with a team of top-tier craftspeople, delivers a visually stunning experience that elevates the genre. The movie picks up immediately after the events of the first installment, with Paul (played by Timothee Chalamet) navigating his destiny as the prophesied chosen one. Amidst breathtaking battles and political intrigue, “Dune: Part Two” weaves a tale of heroism, sacrifice, and survival on a grand scale.

And the Verdict is...

This is a bit complicated.

If you haven't seen the first film, then I don't think you will like or appreciate this film. You will easily get confused on who screwed over who, and why this person wants to kill this person.

However, I think this film is better than the first film. Villeneuve’s vision is both jaw-droppingly weird and visually thrilling, but it doesn’t shy away from its pretentiousness.

As Paul’s journey unfolds against the backdrop of interplanetary conflict, the movie explores themes of prophecy, identity, and loyalty. Whether you’re a fan of the source material or a newcomer to the universe, “Dune: Part Two” is an experience that demands attention and sparks conversation.

This movie was made for a movie theater with a bitchin' sound system, big screen, and really comfy chairs. So, do yourself a solid and splurge for the good seats. However, you should probably stream the first movie before you see this one.

If you enjoy what you've read here and you think I might have a clue what I'm talking about, then please reach out to me if you would like me to present to your firm or organization. I have experience talking to professional organizations, trade conferences, as well as universities. I've also appeared in newspaper articles and podcasts. Also, I'm available for birthdays and bar mitzvahs.