The approach to managing and growing your money should be in a way that caters to the kind of time you want to expense to grow it.
If you are more passive about it, and would want it to grow with the general economy, a systematic approach to buy low and sell high could prove better than picking stocks.
Many season market commentators including, Buffett, Munger and now even Ritholtz advocate building a portfolio of ETFs. The main reason to use this over unit trusts or mutual funds? Costs.
Ritholtz provides in this article how to keep investing simple:
1. Use ETFs to get equity exposure more often than picking individual stocks.
2. Valuation when making purchases matters more than anything else I can think of to your long term investing success.
3. Low Cost passive investing, dollar cost averaging into 5 broad indices (Big cap, tech, emerging markets, fixed income, etc.) is ideal for do it yourself investors.
4. Rebalance across various asset classes regularly. Do so at least annually, preferably quarterly. (Online tools for doing this should drive your broker selection).
5. Keep your Costs and Expenses low. This may be the only free lunch in all of investing.
6. Reduce your Turnover level; keep it low (this helps with #5, plus most of these)
7. Avoid the Noise: Reduce your consumption of useless chatter, be it in print or on TV. Classic investing books are vastly superior to ephemeral market gossip.
8. Review your portfolio regularly. Check your allocations monthly. To see how your holdings are doing, use weekly, not daily charts.
9. Venture Capital and Private Equity ain’t easy — if you lack the skills, capital and risk tolerance, avoid them.
9B. Most IPOS are a sucker game.
10. Avoid new financial products at all costs.
[Ritholtz | Keep Investing Simple | Read more]
To further clarify point no 4, the main question ask is:
If you are picking individual stocks, how does rebalancing take place? Do you sell a winner or loser?
In another post to sum up his TV appearance at Bloomberg, Barry clarifies:
Take a portfolio model of 60% equities 40% bonds (60/40) primarily held through broad ETFs. After there was a hypothetical big quarter for bonds and a weak quarter for stocks, your 60/40 portfolio ends up looking more like 58% Equities and 42% bonds. The market action has led your holdings to drift away from your allocation. Rebalancing means that you are returning back to your original asset allocation model weightings.
Why do this? Because history teaches us that all broad asset classes will eventually mean revert. The goal of the rebalance is to take advantage of the short term volatility and price swings to move you back towards your model 60/40 allocations at more advantageous valuations.
In practice, it means you trim your bonds holdings after they had a good run and you buy equities after they have fallen. If you have more asset classes, you do the same, rebalancing to your model. A typical allocation may be that are 62% equities 31% bonds, 4% Real estate and 3% commodities 62/31/4/3. On a regular basis, quarterly, semi annually or annually, you rebalance back to your original allocation.
50/50 is a very conservative allocation, 60/40 more moderate, 70/30 more aggressive, 80/20 even more so. The original allocation decision you make is a function of your risk tolerance, assets, and time horizon.
If you own Berkshire or Visa or JNJ (as we do) and they are working, you lock them in your portfolio and let them run. With individual stocks, you DO NOT rebalance — but eventually, you may have to make a sell decision. That is an entirely different conversation.
Asset classes mean revert. Any stock can go to zero, but an asset class cannot. And the reason to own an individual name (versus an index) is that it has the potential to outperform that broad index. That’s why you DO NOT rebalance them — it defeats the primary purpose of owning individual companies. .
[Ritholtz |A word about portfolio rebalancing | Read more]
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