The Strangest Investment Strategy Ever Created

"Asset rebalancing" may be the strangest investing strategy ever created and unfortunately, this a strategy we are seeing more than frequently in 401k plans, 403b annuities, as well as in subdivision 457 postponed compensation programs that we counsel on for our clients. Don't utilize it!

"Asset rebalancing" intends setting your portfolio parameters…say you be after to have got 15% each of your portfolio inch certain areas…healthcare, 15% inch technology, 15% inch consumer goods, 15% in financial pillory like banks and insurance companies. Or you could have got 20% inch large cap stocks, 20% inch small cap stocks, 20% international…you get the picture.

Now, according to the plus re-balancing program, every quarter, you re-examine these parameters. If, for example, the engineering part of your allotment have got grown significantly and now stands for state 22% of your portfolio, instead of the original 15%, the computerised programme would sell adequate to get that part back in line, and also travel money into the other sectors which have not kept up, to balance everything again. The conception is to get investors to take additions off the tabular array (a good idea, in theory) and also re-allocate it to the sectors that are not working. "The pitch" with plus rebalancing is that you would essentially be merchandising a grouping when things get high and putting money in other sectors when they are low.

It is totally acceptable to take "some" money off the tabular array when things work really well. My clients cognize our game program for taking money off the tabular array before we even begin. But putting money into countries of the market that are not working? Hmm. A few inquiries protrude into my mind:

1. Why are you investing in an country of the market that is not working to get with?

2. Why would you set more than money into it?

There is an easier manner to maintain your assets in the right countries of the markets, without re-balancing your assets every quarter. And it have been at our disposal for over 50 years, but very few people utilize it.

In the 1940's, Earnest Staby (an early point and figure chart pioneer) came to the decision that when the markets were frothy, it seemed that every chart he examined looked great. And when the markets were low, all the charts looked abysmal. Staby wanted some index that would state him when the hazard in the market was high and also when the hazard was low. What Staby came up with was the conception of the "bullish percent indicator." The bullish percent index is merely the PERCENTAGE of pillory in a grouping that are on point & figure bargain signals.

When the bullish percent for a grouping of pillory is high, that agency most of the pillory in that grouping are already on bargain signals. There are only a few pillory left in the grouping that could generate new bargain signals…only a few name calling left that could go on propelling that grouping higher.

Another manner of explaining a very high bullish percent reading for a grouping of pillory is that all the money that is going into that grouping of stocks…is probably already in it.

And when you see the percentage of pillory on bargain signalings in that grouping falling, the hazard is that supply (not demand) is in control. Then the hazard goes greater for a loss of principal.

Using the bullish percent index can state us when a grouping of pillory moves in favour and when a grouping falls out of favor. In the twelvemonth 2000, the bullish percent charts were telling us to avoid large cap pillory and also to travel into small cap stocks. These indexes can also state us what sectors of the market stay low hazard and other sectors that are now becoming higher risk. That should be pretty utile information!

Using the bullish percent index will state us what sectors to stay in and what to get out of…instead of letting a computing machine automatically "rebalance" our assets every quarter! This manner we allow ourselves to remain in a sector that goes on to run higher.

Here is a good example: throughout this twelvemonth 2005, as oil have got tracked higher & higher, a computerised plus rebalancing programme would have been taking progressively more than than & more OFF the table, instead of sticking with a winning sector!