Investment Lies: That you have been told!
Head held high, eyes on the stars, nose to the grind, ear to the ground, money where the mouth is, tongue tied, chest out, feet on the ground, have you tried doing all this simultaneously?
Really tough…stop listening to the experts!
It is a whole long list of lies that I can enumerate (some American, some Indian, some generic)…some are partially true, some are completely wrong, some are….but nothing is a completely true statement.
Today will make a few such statements..as time goes by will explain them!
1. But for the subprime crisis, the American economy was strong and resilient.
2. This is just a subprime crisis, and once it is solved, America will be strong again
3. The Fed (Rbi) sets the interest rates in the economy.
4. Diversification is a fantastic wealth creation tool. If everybody had a well diversified portfolio, there would have been no crisis at all.
5. Buy low-sell high is a sure fire, time tested and workable Investment strategy.
6. The stock market in the US will bounce back to original levels as soon as the Fed bails out all the industries.
7. The dollar is really strong and is currently in a small blip.
8. Obama wants change! (please give it to him)
9. A buy-and hold long term investing strategy yields superior results over trying to sell ..and buy.
10. Re-balancing is a fantastic wealth creation strategy.
Sambaran
Really curious to get the explanation of 10th lie i.e. “rebalancing is a fantastic wealth creation option”.
subra
Sambaran explanations are welcome..please make an attempt..
venshu
Subra,
I loved no. 8 – I have some change too!!
Sambaran
Assume I have chosen a 70-equity 30-nonequity allocation. Equity falls and I move fund from non-equity to equity. The fall of equity continues and I move more and more fund into equity. Eventually I will hit a limit where I can move no more. After that I will be forced to see my allocation go haywire as I do not have any cash left in non-equity part.
What I described above is the only ‘hitch’ I have vis-a-vis asset-allocation-and-rebalancing. Otherwise I do believe that asset-allocation-and-rebalancing is a fantastic wealth creator. I look forward to your explanation of myth#10.
Young@Market
Sambaran…
lets say u have 100 rs.. 70 in equity and 30 in debt
equity goes low and how at 50 rs.. debt at 30 rs… so equity is now 62.5 % and not 50%. so to make it 70% again u just have to move 6 rs from debt to equity…. I wonder how u move everything to equity and become 70:30 … hope this helps……
Sambaran
@Young@Market,
When I said “Eventually I will hit a limit where I can move no more”, I meant that I will hit against my emergency-reserve (the amount of liquid cash I must keep with me).
However, may be I see your point. I need to keep the emergency-reserve out of calculation of 70-30. In that case, even in continuous downward movement of equity, I will always have some non-zero finite value in non-equity which can be moved to equity and 70-30 distribution will be regained.
Looking forward to Subra’s explanation of the ‘lie#10’.
Sanjay
I agree with Sambaran.
rebalancing is as essential as diversification. I understand that having diversified portfolio will decrease profits but it also decreases the risk.
we can draw an analogy with direct equity investment vs mutual fund investment. If you are really smart, you can find some multi-baggers and make huge profits. And if you are not smart, then put your money in mutual fund.
Similarly, if you are really smart, you can make profit by timing the market (you are not rebalancing then you have to know when to exit stock completely and in one transaction) and having concentrated portfolio. But if you are not smart, then keep rebalancing.
It is also important to have a sense of fair valuation. One interesting case would be when you try to rebalance when the bubble is at peak. For example if sensex reaches to 31000 in one month and a novice investor start investing in stock market at that time. The investor will keep pouring money in stocks till sensex comes to 21000. What the investor has done is to increase his losses 🙂
Looking forward to Subra’s explanation of the ‘lie#10′.
subra
diversification is a CAPITAL PROTECTION strategy, NOT a capital enhancing strategy.
You can argue that if u do not protect how will you grow when the markets revive! However it is still a defensive strategy, not an aggressive strategy.