Sunday, January 31, 2010

The Four Pillars of Investing Part 8

This is a multi part series dedicated to the review of  William Bernstein's book The Four Pillars of Investing.
The Four Pillars of Investing: Lessons for Building a Winning PortfolioNumbered Page references are from the hardcover edition.

Chapter 14 Getting started, keeping going
Make the switch to your new portfolio the same day. Once you have arrived at the allocation the next step is portfolio rebalancing.

Starting out and avoiding fees use the dollar cost averaging approach. One better than that though is the value averaging approach described by Michael Edleson. Same target investment amount each month, but in the account. If the account is down, pour it on. If the account is up, pour on less. Technically, you could reach your yearly goal of contributions sooner than the year, or a bit longer. It is suggested that this not be done with ETF’s because of the additional transaction fees would be too great. Two to three years for funding is good because a market correction should occur giving you maximum benefit. The benefit is the experience of investing regularly even during times of pessimism and fear – a very useful skill indeed.

Play the long game. You get more return if you portfolio rebalance once every few years. Reduce risk by diversifying. The psychological conditioning of being a financial contrarian is just what you need to retire rich. You must sell when it is all the rave and buy when all are crying doom. That is how you win in poker, and how you win in the long game of investing. When the chips are down, it will not bother you too much to toss a few more coins into the pot when everyone around you is folding his hand.  Again be wary of tax consequences if doing this in a taxable account. Tax sheltered could rebalance more often, but it is not suggested more than 2-3 years because sometimes it takes that long for a trend to run its course. Remember the five years on the five asset classes.

Two advantages of the small investor. When confronted with a downturn, a smaller portion of the portfolio is exposed and therefore you will be less worried.  Rebalancing in retirement is just the opposite of when your portfolio is growing due to your savings. You just withdraw from the sectors that have grown too large, again selling when they are high.

Again, if in need of help. Hire only a fee based advisor.

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