The takeaway. Today we discuss how Asset Allocation enables you to buy low and sell high–the holy grail of investing. It’s powerful stuff. Also included is how asset allocation let yours truly leave my job, pay off my house, and move to Italy for a year. It works when you work it.
Ahoy, Boomer! Today we’ve reached the holy grail of investing: buying low and selling high! (Have you ever heard five more luscious words?) There are two ways to buy low and sell high.
Buy low, sell high: the hard way vs. the easy way
Hard way to buy low and sell high. Spend 40 to 60 hours each week for 50 weeks. Read reports, comb through data, listen to company conference calls, and subscribe to high-priced newsletters. Hope to “discover” that tiny company that will become the next Microsoft or Google.
Don’t be fooled. Reading about that tiny company in a magazine or the newspaper, hearing about it on TV, or getting a tip from your brother-in-law, does not constitute a “discovery.”
Here’s the problem. By the time the information has made its way to you, humble Boomer, the big money has already been made.
Typically, you must be in the industry of the company in question, or, working on Wall Street to make these discoveries. You can still make money. I’ve managed it. But it’s hard and a ton of work.
Easy way to buy low and sell high. Practice asset allocation. Period. 🙂
Asset allocation is so simple, most people ignore it. They ride the market all the way up, hang on tighter as it crashes, then sell at the bottom. They never experience the kinds of financial gains they could. “
How does asset allocation force you to buy low and sell high?
It forces you to sell off a portion of your overachievers (sell high) and buy more of your underachievers (buy low).
For example, say you have 50% of your portfolio in stock mutual funds and the other 50% in bond mutual funds. (Preferably these are index funds, which are a type of mutual fund and discussed here.)
If the stock market has a strong year—meaning stock prices go up—the percentage of stocks in your portfolio could balloon to 60%, 70%, or even higher. Now you have far more money in stocks than in bonds. You’ve exceeded the 50/50 stocks vs. bonds allocation you set for yourself.
What to do?
It’s time to rebalance your portfolio.
To rebalance, you trim your stock mutual funds by selling off all those shares that exceed your 50% allocation.
Asset allocation forces you to buy low and sell high.“
Do you see what you just did, smart Boomer? You sold on the upswing.
What do you do with the money from the stocks you just sold? You buy more bonds for your bond mutual fund portfolio.
And by buying more bonds, do you see what you just did, Boomer?
Take a bow. You bought your bonds when they were selling low. You sold your stocks when they were selling high. You’ve reached that holy grail of investing.
How long did it take? Thirty minutes? Half a day? Not bad. You’ve arrived.
What?!!! The thrill of buying low and selling high doesn’t feel like you thought it would? Boomer, that calm almost bored feeling is what not outliving your money feels like. “
Rebalancing is something you should do only once a year. Do it any more than that and you’re selling your winners before they have an opportunity to make you some real money. You’re also whittling away at your profits by paying unnecessary commissions when you buy and sell too often. This is called “churning.”
Not feeling it?
The thrill of buying low and selling high doesn’t feel like you thought it would? I get it. Asset allocation is the Brussel Sprout of the investing world. It’s so boring and so simple, most people ignore it–at their peril. They ride the market all the way up, hang on tighter as it crashes, then sell at the bottom. They never experience the kinds of financial gains their portfolios are capable of.
Get over it! (I say this with love.)
That calm, almost bored, feeling is what securing your future feels like. It’s what not outliving your money feels like. Welcome aboard, Boomer.
Brag alert: how asset allocation let me leave my job, pay off my house, and move to Italy for a year.
Boomer, let me brag just a little. Ok. Maybe a lot. (Don’t you hate braggarts? Me too. But I tell this story to prove my point.)
It was the dot.com boom – 1995 through 1999. The stock market was averaging returns of nearly 30%; that means people were doubling their money roughly every 2 ½ years. (See the Rule of 72.) Technology stock returns were even higher.
And my cousin Rita was in full braggart mode; (not her real name, not necessarily my cousin, not necessarily a woman. But a very real person–and mildly annoying). Cousin Rita let her stocks grow to the point that they consumed her entire portfolio. I religiously rebalanced. Each January 1, I sold off enough stocks to return me to my desired 65/35 stock/bond allocation.
Do you see what I did there, Boomer? My stocks were selling high and I sold some of them off.
Not glamorous. Just boring wealth-building. Yawn.
In contrast, cousin Rita let her stocks keep growing. Her portfolio doubled twice during this five-year period. Mine didn’t. My portfolio included not only stocks, but the protection of bonds as well. Rita had long ago gotten rid of her bonds. I was piously practicing sound asset allocation principles. Rita, the heathen, was not. 👿
Her money was entirely in stocks–mostly tech stocks. It was clear to me that…
She had no protection.
As you know from Part 1 of this series, without bonds, she had no protection against the stock market’s volatility. She continually asked me how much money I was making. (What lunatic does this?) I was always making less money than she was.
When the dot.com bubble burst, as bubbles always do, Rita lost all of her gains (and then some). She was about where she’d started five years earlier. Given how many tech companies went bankrupt, she was lucky to get off so cheap.
And yours truly?
By buying low and selling high, I’d built a portfolio big enough to pay off my modest house. (Spend less than you earn.) And I made enough money to leave my job, lock the front door, and jet over to Italy for a year.
Listen, smart Boomer. I hate braggarts. I (almost) hate myself for this brag. But I’m bragging to show you the power of asset allocation. It’s powerful stuff.
Boomer, be a pig, but not a hog.
As my Econ professor used to say: pigs get fat, but hogs get slaughtered.
My portfolio got fat. Rita’s got slaughtered. Rita was a hog.
I, myself? A mere pig.
Strive to be a pig, but not a hog, savvy Boomer. And now…
You’ve reached the holy grail of investing. Bravo, Boomer. You know how to buy low and sell high. You know how to supercharge your investments. Even with no MBA, you know more about portfolio management than most civilians ever will.
Take another bow. (Encore! Encore!)
And don’t forget what we said in Part 2 of this series. Make sure your assets are allocated in a manner that’s conservative enough for you to sleep nights, but aggressive enough that you won’t outlive your money.
You’ve got this, Boomer. You really do.
Now go forth!
P.S. And avoid the likes of Rita. They bring out the worst in us. (I ought to know.)