Buy, Hold, and Sell!

Chapter 24The Rebalancing Strategy

Who's in charge, you or your investments?

You know not to believe in buy-hold. You understand the importance of a sell strategy. You know your magic number. But that's not quite enough. You need to be in charge of your investments—don't let your investments tell you what to do. You can't just make a bunch of investments, come back 10 years later, and expect something good to have happened. You need to be a proactive investor. You need to be the boss.

It's easier than you think to slide into reactive mode. Let's take an example shown in Figure 24.1: Let's say that you've analyzed your needs, done all the calculations, and decided that a 50/50 portfolio—50 percent stocks and 50 percent bonds—has the appropriate amount of risk for you. You've decided to invest $200, so you have $100 in stocks and $100 in bonds.

Figure 24.1 Invest $200 in a 50/50 portfolio.

You're cruising along and your stocks go up 60 percent. Holy cow! But your bonds lose 10 percent (Figure 24.2). Boo hiss.

Figure 24.2 $200 Investment, now $250. Up 25%.

You now have $160 in stocks and $90 in bonds. You made $50. That's 25 percent. Fantastic! This is great! Life is good!

But now you have a problem. Your portfolio morphed. It's not 50/50 anymore. It's now 64/36.

Your portfolio ...