The Antidote for Mania
Odds are pretty high that when you and I first sat down together, we talked about creating your beautifully diversified portfolio. A deliberate and intelligently conceived blend of different assets, with the intention of helping to pay for the things which are important to you.
After the initial portfolio construction, the next thing that usually happens in the real world is your portfolio starts slipping out of balance. This is normal. Some of the positions you own will do better than others, which may at first sound pretty great………….until you realize that more and more of your money is concentrating into things which are becoming pricier and pricier.
This process can continue for some time, but eventually I will decide it is prudent and important to execute a rebalance. This is a simplification, but basically I harvest some of the gains from the stuff that has become pricey, and reinvest that money into things which have become relatively inexpensive.
Interestingly, this is the exact opposite of what most investor’s do. Most watch something rocket to the sky, and their lizard brain kicks in. They think “I should sell my stuff that’s just lying there, and put all the money into the rocket ship.” This is how people can get themselves into trouble.
Remember the tech stock boom and bust in the late 1990’s? Tech stocks themselves weren’t necessarily the problem. The problem was way too many investors abandoned a healthy diversified portfolio in favor of a 100% tech stock portfolio. “What do you mean my money is not diversified? My IRA is spread out among Cisco, Sun Microsystems, Corning, Qualcomm, Microsoft, Dell, Yahoo, and Intel.” That is like eating a diet of white bread, wheat bread, whole grain bread, sourdough, bagels, and rye bread. It’s all bread.
Rebalancing. It’s the antidote for mania.
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