Investment Process

Rebalancing Game Plan

Spring is one of the best times to be a baseball fan.  Right now, we can like the Tigers simply because they are our team and because they’ve looked great in the first few games!  There is no baggage piled on yet, no insurmountable amount of losses, no injuries etc.  These days are for optimism and dreaming.  The players and staff have spent a lot of time developing a game plan and sticking to this plan could possibly make or break their season. Having a game plan is a big part of a team reaching their goal of the playoffs and for you, it is important in reaching your investment goals.

An investment strategy that uses a defined investment process cannot ignore one of the most crucial steps, monitoring and rebalancing.  The question is not if, but how.  Rebalancing encourages good investor behavior by forcing you to sell some of your winners and buy more of your losers. 

There are several ways to rebalance a portfolio: on a calendar basis, by utilizing cash flows, and opportunistically.

Calendar rebalancing is done by choosing a specific date, usually arbitrarily, to rebalance portfolios and can be done on a quarterly, semiannual or annual basis.  Studies have shown that there is not much performance differential between the different frequencies of rebalancing[1].  By utilizing a set calendar date to rebalance the best buy-low/sell-high opportunities can be missed.

In contrast, cash flow rebalancing can be used for accounts with cash moving in or out of the accounts.  For example, if a cash distribution is needed the asset that is the most overweight can be sold to raise cash.  If cash is flowing into the account, the asset that is most underweight can be purchased. 

Opportunistic rebalancing is the other option.  Look often, but actually rebalance infrequently.  Studies have shown that monitoring accounts frequently, i.e. looking at least bi-weekly increases the likelihood that rebalancing will  occur at the most opportune times, capturing sporadic buy low/sell high opportunities, more than doubling the increased returns from the rebalancing benefit over calendar rebalancing.

Whatever your rebalancing technique is, you need to have a game plan and stick with it over time.  Having a strategy can help take some of the emotion out of investing.  Speak to your Financial Planner today about establishing your plan and check out these recent blogs to help guide you.

Links to:

Introduction: The Investor’s Chief Problem

Strategic Allocation: Building your foundation

Tactical Allocation: Deck the Halls with tactical allocation

Types of Investments: Time to declutter

Buy Process: Salad Surprise

Sell Discipline: The Gambler

[1]Daryanani, Gobind CFP®, Ph.D.”Opportunistic Rebalancing: A New Paradigm for Wealth Mangers.” 2008.   Journal of Financial Planning.

All illustrations are hypothetical and are not intended to reflect the actual performance of any particular security or investment account. Future performance cannot be guaranteed and investment yields will fluctuate with market conditions. Investing involves risk and you may incur a profit or loss regardless of strategy selected. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of [FA NAME] and not necessarily those of RJFS or Raymond James.

Salad Surprise

A friend of mine, let’s call him Tom, is constantly put on a diet by his wife.  One of the ways Tom appeases her is by ordering taco salads in a restaurant instead of a traditional entree.  She assumes he’s being healthy, but little does she know, some of the worst taco salads can pack in as many as 1,700 calories and over 100 grams of fat! Someone needs to do her homework.

As important as it is to the success of dieting to understand what you are eating, it is equally important to understand what you are buying when making an investment.  The due diligence process is initiated with the establishment of current tactical allocation, which you can read more about here.  With the asset classes identified, it is time to start doing your homework by researching to identify the appropriate securities to fill each asset bucket.

  • Define and Research:  Review asset category and characteristics of the category.  Consider opportunities and risks.
  • Know what you own:  Look at a prospectus or Statement filed with the SEC to make sure you are buying what you think you are buying (is it a healthy salad or, in Tom’s case, the equivalent of 37 strips of bacon?). 
  • Quantitative Review: Review of performance and risk characteristics of investment options within the category.  Criteria may include:
    • Look at performance standouts over different time periods – 1, 3, 5, 10 years.
    • Review performance in difficult time periods (bear markets or periods of performance difficulty for the asset category). 
    • Check out standard deviation, or risk, relative to similar investments.
  • Establish reasons for conviction:  This can prevent you from falling into a common investor behavior of selling the investment when it is out of favor (which is usually the best time to purchase it).

Do your investment “waistline” a favor and do your homework. Don’t be fooled by taco salads, make sure you are really getting what you want when it comes to investing by having a defined buying process or talking to your financial planner today about establishing one that is appropriate for you!

The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material.  Past performance may not be indicative of future results.

Time to Declutter?

Do you ever feel like this when thinking of your portfolio?  Making investments without factoring in your investment process could end up adding more clutter to your portfolio without adding any value.

As you might recall the investment process starts with Strategic Asset Allocation, which is the establishment of your mix of stock, bonds and cash (see my post from 11/4/11).  Followed by layering in tactical allocation, overweighting or underweighting asset classes as the opportunity arises (see my post from 12/2/11).

Choosing the proper type of investment is vital to the continuation of your process.   There are many different types of investments that may be appropriate for you.  Individual company stock is usually the first that comes to mind for investors.  Common stock represents direct equity ownership in a corporation.  Returns can come from dividends paid or price appreciation.

One could also purchase bonds issued by many of these same companies, as well as governments or municipalities.  This means the entity owes you your principal at a specified date in the future and interest in the mean time in exchange for borrowing from you.  Many factors need to be considered when investing in a stock or bond and this can be overwhelming even for many investment professionals.  So many investors turn to professional money management.

Professional money managers can take two basic approaches to investing.  First, active management is simply an attempt to "beat" the market as measured by a particular benchmark or index.  Passive management is more commonly called indexing. Indexing is an investment management approach based on investing in exactly the same securities, in the same proportions, as an index.

So if you find yourself buried in stacks of paper every month talk to your Investment Professional to de-clutter your portfolio and determine which types of investments may be appropriate for you.

Dividends are not guaranteed and must be authorized by a company’s board of directors.  Bond prices and yields are subject to change based upon market conditions and availability.  If bonds are sold prior to maturity, you may receive more or less than your initial investment.  Holding bonds to term allows redemption at par value.  The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material.  Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.