Rebalance Your Portfolio in an Unbalanced World

by Guest Contributor · 3 comments

“How do I rebalance my portfolio in this crazy market?”

That was a question I received recently in a long email from James.  He explained that he was a “moderate” investor.  He had a good mix of assets in bonds (of various maturities) domestic & international stocks (small, mid and large cap), and natural resources.

Even though James was broadly diversified, he’s still getting slammed.  He’s lost over 50% of his nest egg and he isn’t happy.  He asked me if he should rebalance now and if so, how?

Why People Rebalance and How to Do It

The concept of rebalancing is meant to help you sell high and buy low.  (The “buying low” isn’t much of a problem these days….its the “selling high” that has everyone stumped).  Let’s consider a simple example.

Assume you originally invested $200,000 and you wanted a 50-50 split between bonds and stocks ($100,000 in bonds and another $100,000 in stocks).  Now, your portfolio is worth only $100,000.  The $100,000 in stocks is now only worth $40,000 and the $100,000 in bonds are now worth $60,000.

To get back to the original 50-50 split, you’d sell off $10,000 in bonds and buy stocks.  If you do this, you are buying the assets that have gotten beaten up the most (buying low) and selling the asset that has done relatively better.

Is rebalancing important now?  It depends.

First, if you are broadly diversified in equities, you probably noticed that everything got creamed last year and isn’t doing so well so far this year either.  Some advisors will tell you that it’s critical that you rebalance right now.  I’d say, right now, it might actually hurt you – at least in the short-term.  Why?  Because the investments that are doing poorly may continue to get whacked.  Nobody knows.

Personally, I think it is very important to be strategic right now.  If you are in the market, stay with high-quality equities.  Stay with short-term high quality bonds too.  This flies in the face of textbook rebalancing and if that bothers you…..don’t do it.  In normal times, rebalancing does make sense….its just that I can’t promise we’re in a “normal” period right now.

If you decide you want to rebalance, beware of two problems: it can take time and it can be expensive.

How can you solve those two problems?

Rebalance once each quarter.  I say this because even if you buy no-load funds, most have short-term redemption charges.  However, in most cases, that penalty is not imposed if you hold the funds for 90 days or more.  That means you can buy and sell at will without worrying about costs.  Please make sure to check your specific funds for restrictions.

If you want to rebalance more than quarterly, you should buy a number of funds in each category and ladder the purchases so the 90 day period expires at different times.  This is a bit more complicated and I don’t have the space to explain it further here. But if you work with an advisor, they can explain this to you.

It will be much easier to rebalance your funds if you keep all your funds at one custodian like TD Ameritrade, Fidelity or Schwab.  As an alternative, you could have all Vanguard funds or all Fidelity funds.  Just don’t have multiple accounts at multiple fund families unless you love the idea of headaches and stress.

If you decide to rebalance, it doesn’t have to be a costly affair.  If you decide NOT to rebalance, that might be ok too.  The bigger issue, I think, is how you approach your money right now.  More than ever before, it’s very important to keep your emotions out of your investing behavior if you want to stay on track.

What Does Fiscal Stimulus Mean?

by David@MoneyNing.com · 18 comments

This is a guest post from Manshu, author of OneMint.com who started writing articles when he was majoring in finance.

With the economy reeling under a recession, the word that you read quite frequently is stimulus. But what is it? First, let’s explore a few terminologies: recession, GDP, consumption among others.

A recession is characterized by the contraction of a country’s Gross Domestic Product (GDP). The GDP sums up the total economic activity that happens within a country and is the sum of the following things:

GDP = Consumption + Government Spending + Investments + Net Exports (Exports – Imports)

Consumption refers to the money spent by private households and businesses on the things that they consume. As you can well imagine, consumption shrinks considerably during recessionary times.

Why you may ask? The number of times you go to a restaurant reduces and so does the number to the grocery store visits. As a result, the income of the grocery store and restaurant goes down too. When that happens, they lay off their employees and those employees further reduce spending. Because of this, businesses are discouraged from expanding and going out on new ventures and the investments in the above equation goes down as well.

Economists call this the fall in Aggregate Demand.

In order to stem this fall, the government launches a spending program to boost the aggregate demand and stimulate spending and economic activity. This is known as a Fiscal Stimulus.
There are various ways in which a fiscal stimulus can be administered but there is no solution that can fit all situations.

The two main ways of providing fiscal stimulus are:

  1. Tax Cuts: By cutting taxes, the government allows people to keep more in their pockets and ultimately spend more. This increases Consumption in the above equation.
  2. Government Spending: Direct government spending in infrastructure, social welfare or other such things increases the Government Spending in the above equation and helps boost the GDP.

When there’s talk about fiscal stimulus, you will sometimes hear people talk about the multiplier effect. What this basically means is for the effect (in dollar terms) of the economy with every dollar that the government spends. Hopefully, this is more than 1 (ie, the economy grows by $1.50 for every $1 that the government spends). There are currently debates on what the multiplier truly is right now and whether it even exists.

There’s also debates on whether tax cuts or government spending programs are better for the economy and I think that this debate is largely unresolved as there is no clear indication that one is always better than the other. What do you think? Do you favor tax cuts or would you rather have the government put more programs in places that they deem of need?

Why You Are Important

by David@MoneyNing.com · 7 comments

Every once in a while, I hear a comment about work that goes something like this:

I’m a nobody anyway and what I do is unimportant.

Actually, nothing is further from the truth.

The Story of the Proud Janitor

One of my friends work in the cleaning business and he loves it. I asked him before why he likes it so much since most people would stay as far away from a job like that as possible and what he said stuck with me till this day. He told me that if he doesn’t do his job correctly, everyone at the office will become sick. His duty is to make sure that the office is as clean as possible and ensure a healthy and pleasant environment for all employees. He went on to tell me that even though no one notices him (since he comes in at night), his job is incredibly important and it actually affects so many people’s lives as the employees are at work for so many hours each day.

The Forgotten Tires

Remember my deflated tires last month? If they were not manufactured to still run safely after it pops, there would be no more updates here because I would probably still be in a hospital (that’s if I’m lucky enough to get there). To be honest, I’ve never really thought much about my four tires but they are actually the only part of the car that touches the ground. Without them, it doesn’t matter how powerful the engine is nor how intelligent the computers are because it won’t be going anywhere.  I can probably play music on it but that would be an iPod that’s too big.

The Invisible Screws, Bolts and Nuts

Screws must be among the top ranked items that people throw away or lose. But what happens to your desk if some of them are loose? How about the chair that you are sitting on right now? Would you like to be in a moving car when the nuts and bolts that is holding the engine tight fall out? Didn’t think so.

As insignificant as screws are, they might be more important than probably your airbag. Hmm…

You are Important

You may feel ignored at times, but trust me when I tell you that you are important. Everyone may feel down sometimes but don’t let that feeling continue.

  • You are the World to Your Children.
  • You are the Love of Your Spouse
  • You are the Joy of Your Parents
  • You are the Leader of Your Mind and Soul

You are important, you are important, you are important.

How to Achieve Predictable Stock Market Returns

by David@MoneyNing.com · 13 comments

The idea that stocks provide fairly predictable long-term returns is one of those fundamental beliefs upon which practically the entire investment industry is based. Lately however, I’ve seen a lot of people questioning the validity of that assumption.

And I can’t blame them. Having your portfolio decline in value by 40% in one year doesn’t exactly breed confidence in the value of holding stocks. Unfortunately, volatility is the price of admission.
However, even with the atrocious results of 2008, the (very) long-term return on stocks is still excellent. For example, for the 25 years ending 12/31/08, the market–as measured by the S&P 500–earned an effective annual return of 9.71%. Not bad.

Here’s the catch: In order to have earned that 9.7% return, you actually had to stay invested in the market throughout the 25 years even when the market was going down. Most people don’t do that.

If you bought and sold several times throughout the period, your return could very well be dramatically different from the 9.7% figure. It could be much better, or it most likely is much worse.

In short, if you jump in and out of the market, your long-term returns become much less predictable.

Looking Ahead

We can say with a fair amount of certainty that market returns for the next 30 years will be somewhere in the 7-10% range. (Based on the “Gordon Equation” of dividend yield + earnings growth, as explained in Bernstein’s Four Pillars of Investing and Bogle’s Little Book of Common Sense Investing.)

What we don’t know, however, is what the market’s going to do for 2009, 2010, or any particular year in the future.

If you want predictably decent returns, then buy an all-market index fund and never sell it. At least, don’t sell it until you’re retired and drawing down on your investments.

Want to take your chances at great returns? Then pick stocks. Jump in and out of the market or switch from fund to fund every year. Just make sure that you’re fully aware that with such a strategy is as likely to harm your return as help it.

About the author: Mike writes at The Oblivious Investor, where he reminds readers to ignore the day-to-day market news and focus instead on getting investment fundamentals right. Subscribe to his blog for daily updates.

My Virgin DIY Haircut Experience

by David@MoneyNing.com · 35 comments

My mom calls it the re-opening of Ning’s salon, my friends are laughing at the facebook comments, my wife is proud of her work and I’m just relieved that it’s over. Over the weekend, my first DIY Haircut officially concluded.

How the DIY Haircut Came About

It’s funny how working at home changes someone’s priorities. What was once an important activity like getting a haircut all of a sudden isn’t so critical. I remember reminding myself to get a haircut before my birthday. That was January.

I really didn’t think it was that bad, but my wife came up with an idea after she claims that it could potentially give her more nightmares if she had to suffer through my current “look” – How about I just give you a haircut myself?

First Virgin Haircut Experience

Without thinking, I said “SURE” but when it came down to the night that we were going to cut my hair, I was really nervous. She didn’t seem like she even researched how it’s done so what if she messes it up? Worst yet, what if she cut herself? What about me? I only have one head.

Haircut Trauma

I never knew that I could be so uptight because my shoulder muscles actually hurt the next morning from being so tense. While my wife was carefully constructing her masterpiece, I was frozen. I probably looked like a zombie, but my wife was patient the whole way.

DIY Results

After the intense experience (I thought it was anyway), I picked up my glasses and thought “Wow, I look cool.” My wife was so proud and so good. We should do it another time.

Benefits of a DIY Project

It might not be cutting your own hair, but I’m sure many of you have DIY projects that you want to start too. Here’s what my experience taught me that applies to any do-it-yourself project:

  1. Do it Yourself Projects are Scary the First Time
  2. You May Not Know Everything Before You Start
  3. DIY Gets Easier The More You Do It
  4. Eventually It Gets Completed
  5. The Experience is Always Memorable
  6. DIY Projects can Become the Talk of Your Social Circle
  7. DIY is For Sure a Cheaper Option
  8. Doing it Yourself Doesn’t Mean It’s Not as Good
  9. You Can Always Hire Someone to Finish It if It Gets Out of Hand
  10. You Always Have More Control and You Can Be as Picky as You Want

What’s the Progress of Your DIY Project

So don’t be lazy. Make the move. Start that project and see where it takes you. You might like to do it so much that it will become your hobby one day. For some, it might even turn into a business opportunity. Whatever project it is, you will be proud once it’s finished and you can save some cash along the way.

In this economy, who wouldn’t want that?

3 Big Tips To Save You the Money to Tame Those College Money Worries

by David@MoneyNing.com · 9 comments

This is a guest post from Bill Muhlenfeld, who runs a site that’s focused entirely on college money issues for parents.  Learn more at Money Launch My Kid.

No dollar tips or piggy banks here. We’re going to talk about the big numbers.

Are you trying to figure out how you’re going to pay for your kid’s college with your savings in the tank? Worried about your college graduate leaving with a degree and ten years of loan payments?
Robbing from your 401k or IRA to fund college are among the worst ideas, even more so now that the values of many of those investments are chopped in half due to the economic downturn. There are many sleepless nights in the homes of the college bound now that parents and kids are struggling with the difficulty of floating $200,000 in costs over the next four years without barrel-rolling the family finances over a Niagara of debt.

If you could save tens of thousands of dollars and maybe forgo borrowing altogether, would you? It is not only possible, it’s absolutely doable; and a reminder that the simplest solutions are often the best. Here are three mega-saving ideas for the new (and the old) student:

  1. Start your son or daughter out at a community college, transferring at the end of year one or two. This has become greatly popular during the current recession, and has driven applications up by double digits across the country. Why? It works. When I attended college I was entirely on my own and had a little bit less than no money. I went to a two year college (“junior” they called it then) and transferred in year three. My BA is from the University of Illinois. Nowhere does it mention that I only spent two years among the Fighting Illini. I left college with a degree and no debt.
  2. State schools are also experiencing a sudden, unexpected interest and upsurge of stay-at-home students, all in the interest of saving many thousands of dollars in tuition, fees and living expenses from more “desirable” out-of-state and private universities. Oregon State, for example has a 12 % increase of new applications, a number which seems to hold up across the country.
  3. Let’s not leave Oregon State quite yet, as it is the flip side of our final mega-buck college savings tip. While new applications are up 12%, student transfers are up an astounding 31%. Cash-strapped kids are returning home, where state-supported schools offer some of the best bargains in education.

Remember, you are not alone. Just make sure you get to the front of the line. Even the community colleges and state schools are starting to tighten up on admissions due to the increase in applications.

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