[credit provider=”Daniel Goodman / Business Insider”]
It’s that time of year again…The time when I re-balance my portfolio of index funds.
There’s nothing fancy about this re-balancing process.
It’s not about stock picking (After a decade on Wall Street and several years off, it has become abundantly clear to me that casual stock-picking is a loser’s game).
It’s also not about market timing: I’m not making the changes because I’m expecting some huge short-term market moves (except for the one I describe below).
What it is about is balancing the portfolio to achieve the right balance of risk and expected return — for me, given my risk-tolerance, age, and other specific circumstances.
On this “expected return,” I should say up front that I’m not expecting much, at least not at these price levels.
- Stocks are priced to produce relatively lousy returns over the next decade (~5% or so annually, far below the long-term average of ~10%).
- Bonds are priced to produce almost nothing (and could be quite negative if inflation takes hold).
- And cash isn’t earning much of anything, at least today.
So, all-in, I expect the next decade will be another crappy one for basic investment returns.
But, still, I don’t want to hide completely in cash and bonds and get wiped out by accelerating inflation if the economy ever recovers. And I also don’t want to bet the farm on stocks and get creamed if valuations regress to their long-term means (about 25% below today’s levels).
So, as usual, I’m going to stay balanced.
This year’s rebalancing will lead to my moving some money out of cash and into stocks.
And that means that I KNOW what the market is going to do next.
The market is going to tank.
How do I know that?
Because I’m about to buy some stocks!
When the market tanks after I buy, I will console myself by telling myself that the dividends I am earning and reinvesting are now buying more shares at cheaper prices than they would have if prices had soared and made stocks more expensive.
(And that will be true, actually. The best thing that could happen to me and my retirement fund — the absolute best thing — would be for stocks to completely crash and stay crashed for 10 years while I reinvest every dividend at rock-bottom prices … and then soar over the following 10-20 years. That’s the way you really cash in as a long-term investor, after all; buy low and sell high).
But, of course, that’s the long-term. In the short-term, nothing makes you feel like more of a dope than buying an asset just before it tanks. And I am quite accomplished at doing that.
You have been warned!