Weekend reading

Good reads from around the Web.

One of the hardest things to explain to a new investor is the benefit of rebalancing asset allocations.

Until you’ve had the “aha!” moment, it can seem like madness to reduce your holdings of investments that are doing well, to buy stuff that’s losing you money.

And then, once you’ve had the “aha!” moment – well, then it’s hard to remember what it was like before you “aha!”-ed, making anyone who doesn’t yet get rebalancing seem a bit like a child who doesn’t yet get why they need to eat.

Enter Larry Swedroe, and his short article that proves again how the magic of rebalancing works. Swedroe cites numbers from an author I’ve never heard of, Jaques Lussier, and his book Successful Investing is a Process. Here’s rebalancing in action (US data, but it’s the same principle in the UK):

An investor begins in 1973 with a portfolio that is 50 percent stocks and 50 percent bonds. For the period ending in 2010, stocks outperformed bonds as they returned 9.8 percent versus 7.7 percent for bonds.

If the portfolio was never rebalanced, the ending portfolio would have had an allocation of 68 percent stocks and the annualized (compound) return would have been 8.9 percent.

Knowing that stocks beat bonds by 2.1 percent a year was the investor who never rebalanced better off?

My own experience tells me that most people would assume you would have been better off not rebalancing due to the much higher return of stocks. Yet, a rebalanced portfolio would have returned 9.5 percent, and done so with less volatility.

In other words, the diversification benefit was sufficient to overcome the 2.1 percent disadvantage in returns. During this period the annual correlation of stocks to bonds was close to zero (0.1).

Rebalancing feels bad in the short-term, but it works over the long-term.


From the blogs

Making good use of the things that we find…

Passive investing

  • Even the 2,000-year old Talmud’s asset allocation works – Mebane Faber
  • Market timing advice is just a coin flip – Rick Ferri
  • How not to prepare for the bear market in bonds [The GICs he cites are Canadian structured products. I’d suggest fixed interest cash deposits for diehard bond-averse UK investors] – Canadian Couch Potato

Active investing

Other articles

Product of the week: Foresight is launching a new solar farm fund paying a 6% yield. The Guardian has outlined the pros and cons.

Mainstream media money

Some links are Google search results – in PC/desktop view these enable you to click through to read the piece without being a paid subscriber of that site.1

Passive investing

  • A big guide to exchange traded funds (ETFs) – FT Adviser
  • Investment consultants cost billions yet add no value [Search result]FT

Active investing

  • Why you should buy Royal Mail shares via its IPO – Telegraph
  • Emerging markets cheap vs US [Graph at bottom]Research Affiliates
  • Jim Slater’s Zulu strategy still has legs… – This is Money
  • …and small caps have been delivering [Search result]FT

Other stuff worth reading

  • Merryn: Save more, but not into pensions [Search result]FT
  • Earn over £50,000? You may be able to claw back child benefit – Guardian
  • Forget exports: The UK should build more homes in London – Slate
  • Felix Salmon: The idiocy of crowd funding – Reuters
  • Inequality around the world – Economist

Book reader of the week: Have you joined the e-book revolution? You should – Bob Dylan is writing protests songs, free love is in the air, and there’s the prospect of exciting civil unrest! Okay, not really, but e-readers are convenient – and Amazon is currently offering its full-colour Kindle Fire 7″ for just £99, which is a discount of £30.

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  1. Reader Ken notes that: “FT articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”.”

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