Some years back, my wife and I embarked on a cross-country trip in our first motor home. Driving a 40-foot bus was a bit frightening at first. I was poking along in the center lane of I-75 and big tractor-trailers were whizzing past me.
The bus came with a Citizens Band radio. I tuned in to channel 19, listened to the truckers, and sure enough they were complaining about my slow driving. So I announced myself, told them I was a rookie and asked for their patience.
There was a brief pause. Then one savvy old trucker came on and said in a deep southern drawl, “Son, there is only one rule you need to know to stay safe. Keep’er ‘tween the lines!”
That’s precisely what my team and I recommend every investor do this month: keep your portfolio between the lines.
One of the more popular investment strategies is to ride your winners and dump your losers. It’s hard to argue with that approach. You can buy 10 stocks, have five winners and five losers, and still make a lot of money.
Another popular strategy is to buy and hold, particularly larger companies that are big, profitable, and not likely to go anywhere. Those who recommend this strategy point to historical gains. That’s all well and good; but as Mike Tyson said, “Everybody has a plan until they get punched in the mouth.”
Many of my friends were punched square in the jaw during the 2007-2008 meltdown. Many had recently retired, taken a lump sum out of their 401(k)s, and invested 100% of their retirement savings in the market.
Talk about a right hook! You work for the better part of 50 years, diligently make projections with your financial planner, and then your life savings shrinks by half... almost overnight.
Follow that up with a trip to your advisor who says, “Trust me. Don’t worry. It will come back. It always does.”
In this case, they were right, eventually. The market recovered in less than six years. Does it always do that? Should we just hold an index fund and ride it out? The answer to both questions is “no.”
Protect Yourself Against the Next Right Hook
Portfolio rebalancing can be a very effective strategy, particularly with money earmarked for retirement. No one can guarantee the market will come back quickly from a downturn. Retirement investors must protect their principal because they might not have time to recover from a 40-50% drop in their net worth.
Rebalancing your retirement portfolio is a critical step in protecting your assets. Instead of trying to maximize gains with excessive risk taking, anyone approaching retirement age should look to avoid catastrophic losses so that their portfolio can steadily provide income if and when they stop working.
The Best Protection
At Miller’s Money, protection starts with our three investment category allocations: 50% in Stocks, 20% in High Yield, and 30% in Stable Income (cash account substitutes). Within those categories we’ve implemented significant asset class and geographical diversification. We also recommend holding no more than 5% in any individual investment.
Rebalancing is nothing more than readjusting your portfolio at least annually to keep’er ‘tween the lines.
If you start with a $100,000 portfolio, then allocate $50,000 to your personal Stocks category with no more than $5,000 in any single investment. If you have a good year and your nest egg rises to $120,000, you adjust your stock allocation to $60,000 with no more than $6,000 in any single investment.
We hope that every year our portfolio grows and we have to sell some stocks at a gain to rebalance. Our strategy is to ride the winners and cut short any losses, minimizing the potential for Tyson-style punches to the mouth. Buy and hold may work for 30-somethings, but it can be a death sentence for someone approaching retirement age.
Mr. Market does not care if you are working or retired; at some point there will be another sizable downturn. Rebalancing is key to keeping your wealth in tact when that happens. And, if you’re wondering where (if anywhere) bonds fit in to today’s best retirements plans, you can download a complimentary copy of the new Miller’s Money special report, The Truth About Bonds here.
DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer