The most non-news piece of news yet and what it means for you
By: Sam Swift, CFA, CFP®
It was a big week for me as I came across an article that might have jumped to the top of my “favorite local news stories of all time” list. I mean, I’ve seen some pretty terrific (read: terrible) market headlines in my day, but good golly: “Some people nervous after stock market drop”. That’s the most non-news thing to hit a news channel in quite a while—and that’s saying something.
And the poor Maroney’s. I’d bet the majority of my retirement assets that Terrell and Delores were going about their business blissfully unaware the S&P 500 had even ticked down at all over the last couple days until that camera was shoved in their face and they had to give an opinion. It still amazes me that anything that happens in the market over such a short period of time qualifies as news, but I suppose that’s what happens when you have to fill time late in the summer.
Nevertheless, there’s still a point to be made here beyond the usual, “please don’t pay attention to financial headlines”. Unfortunately, the idea still persists that some random market movements should affect your long-term strategy. The idea still persists that you can be smarter and more aware of day-to-day price movements and profit through market timing. Those ideas need to be killed.
There is, however, something you can be doing that can take advantage of short-term volatility over time and it ties in perfectly with a disciplined investment strategy: rebalancing.
After you set an initial allocation, of course, prices start moving and different asset classes can move in different directions (which is the point to being diversified across different asset classes). For simplicity sake, let’s say you started off with two asset classes that were equally weighted at 50% in your portfolio. If one asset experiences positive returns while the other experiences negative returns, you would start drifting away from your initial target allocation. Thus, at some point you should take action to return to your initial allocation:
The primary goal of rebalancing is to keep your investments near your intended long-term allocation target so that you don’t end up with a risk/return profile inconsistent with your plan. However, there’s a hidden advantage over time to this strategy as well—it forces you to sell high and buy low more often than not across asset classes. Rebalancing becomes a way to use shorter-term price movements to your advantage without ever having to predict which direction those short-term price movements will head.
And I don’t mean to say that rebalancing is a fool proof way to sell high and buy low every time—there will absolutely be times when you rebalance and the asset you just sold continues to go up while the asset you just bought continues to go down. Over time, however, you’ll likely end up on the right side of those trades more often than not while maintaining an allocation that gives you the best chance of meeting your long-term goals.