March 2011
Intermediate to advanced
368 pages
9h 45m
English
Chapter 16
The Discipline of Asset Allocation—Rebalancing
Investing is not easy. It takes a lot of discipline for an investor to choose an appropriate asset allocation and then stick to it. How many investors abandoned their stock allocations after the NASDAQ collapsed in 2000 or after the financial crisis drove down stocks in 2008?
Many investors believe that they can time the market. It’s not just the aggressive investors who have an investment philosophy built around entry and exit from the market. A much larger group of investors are willing to adopt a long-run asset allocation strategy as long as markets behave themselves. But when the stock market swoons, as it periodically does, these investors will abandon that strategy. And having done that, it will be very difficult for them to wade back into the market. After a sharp downturn like we experienced recently, it’s seldom clear when to reenter the market. And by the time the rally is in full swing, the investor has missed most of the rebound. Chapter 1 discussed investor experience during the nine recessions since 1951. On all but one occasion, the market reached bottom before the end of the recession. And in all nine recessions, the rise in the market was very rapid once it reached bottom. Few investors react quickly enough if they time the market.
Investors also abandon asset allocation in boom times. When unusual investment opportunities present themselves, as in the case of the NASDAQ bubble in the late 1990s or the ...
