LIZ ANN SONDERS:Â As most people know, I spend some time in the world of the media, whether itâs on the phone with print journalists or doing financial radio, financial media on television. And more often than not, theyâre three-to-five minute segments, and itâs usually about current events, whatâs going on in the market and the economy. And rarely am I given the opportunity in that forum to get down to the basics and talk about--arguably, what is much more important to investors than what the market did today, what we think itâs going to do next week--and it goes back to the tried-and-true disciplines around things like diversification and rebalancing. As most people know who read our work, since we put out our 2018 outlook and then we updated it mid-year, we have talked about the fact that we believe we are late in the cycle, and, as a result, I think disciplines around things like diversification and rebalancing are even more paramount now than they are in general. Theyâre always important.
And let me talk about some of the reasons why it makes sense--in particular, right now--and a way to think about the concept of rebalancing maybe in a little bit different a way than you might have before. I think most people understand the benefits of diversification. But, really, the point of being diversified across non-correlated assets is to smooth out the ride, so that youâre less likely to make rash, panicky kind of decisions, either in or out. The purpose is not to generate the highest return, but to get above-average returns, but with much lower risk, which--again, helps to smooth the ride. Rebalancing comes into play, especially if youâre in more volatile markets, where you are trimming from asset classes that have outperformed, adding to asset classes that have underperformed. And what that does is it forces us to do exactly what weâre supposed to and weâve been taught to do, which is buy low, sell high. Often, when weâre left to our own devices, we tend to do the complete opposite.
What rebalancing does, as well, is your portfolio tells you when itâs time to do something. You donât have to worry about which bombastic analyst or strategist--me or anybody else--has the right "call" on any given day or any given moment. You donât have to rely on your own intuition or instincts as to have we hit a market top, have we hit a market bottom. Your portfolio will tell you when itâs time to do something. And if you apply that discipline, especially if you have a diversified portfolio and you have multiple asset classes on which you can apply that rebalancing discipline, thatâs the closet thing youâre going to get to a free lunch in this world of investing.
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