On the subject of diversification and rebalancing (you can’t have the latter without the former, although the reverse is certainly NOT true), Rick says:
I don’t expect the market to behave consistently over any significant period of time. The reason I chose an example with no gains was to show that rebalancing can make a profit from volatility even when there is no underlying price appreciation. I suspect that is the mathematical explanation behind the study SiliconPrairie referenced. If a market was continually increasing then 100% stocks should do better- not that that is very realistic either!
I can believe some rebalancing could do better- especially with all of the market volatility we’ve had this year. I really wish I could time the market. I console myself with the fact that no one can really time the market with long term success.
I can rebalance though- as it can be done with a calculator rather than a crystal ball!
What Rick says is true …
… just understand that if you are committed to a diversification / rebalancing strategy, you will most likely:
a) under-perform the market over LONG periods of time (simply because you will have less in the market – on average – than a 100% stock portfolio)
Remember: the market (DJIA) has NEVER returned less than 8% in ANY 30 year period over the past 100+ years – I strongly suspect that if you were 100% invested the day before the market started to crash in October 2007 and simply waited 30 years, the same will hold true – and,
b) have to content yourself with not being able to reach a Rich(er) Quick(er) Number:
That’s OK for some … but, the premise under which I write is that it’s not OK for my target audience. That’s all 🙂
Is it OK for you?