This Move Could Help You Beat the Market by 21.97% in 2015

Keith Fitz-Gerald Jan 02, 2015
11 

Welcome to 2015 – I’m thrilled you’re here!

I think this year is gonna be absolutely filled with opportunity for investors, perhaps more than ever before. But few of us are set up to take full advantage of it. That’s because most people’s portfolios are totally out of whack. (I’ll show you what I mean in a moment – and why it cramps your returns.)

But I’ve got great news for you.

There’s a stunningly simple tactic you can use to achieve significantly higher returns – 21.97% higher annually, on average, over the last 14 years, in fact. But that’s far from the only reason I want you to use this tactic today…

First, it is proven by study after study after study to be a foundational element on the path to higher profits.

Second, it is a way of injecting discipline into the investment process. That makes it an important risk-control mechanism.

And, third, what I’m about to share with you requires only about 20 minutes a year to do. Yes, a year. That means you can pick one day you won’t forget – like today, the first trading day of the year or perhaps your birthday – to make it happen.

… and immediately start building the kind of wealth you deserve.

Here’s how to start this year off right for your money.

The tactic I’m talking about is rebalancing.

Most investors haven’t heard of rebalancing. That’s very surprising, given all the lip service Wall Street pays to fancy-pants diversification, hyping stocks, and day trading as a sure route to wealth these days.

What I like about rebalancing is that it’s simple yet immensely profitable, because rebalancing forces you to buy low and sell high. There’s no ambiguity, no emotion, and no second-guessing yourself, the markets, the Fed, China, Russia, or any other influence in the headlines.

What I positively love about rebalancing is that it can lead to huge performance gains, even if the markets drift lower. Not too many strategies can do that.

How huge?

Try triple-digit huge – that’s why it’s a Total Wealth priority and absolutely critical to the success more than 750,000 subscribers and readers around the world have enjoyed over the years as a part of the Money Map Report’s proprietary 50-40-10 Strategy.

Rebalancing isn’t difficult. It doesn’t matter if you’re a newly minted graduate with $1,000 to your name or a sophisticated investor with 50 years of experience and $100 million. Anybody can do it.

I want you to have every advantage possible when it comes to building wealth, so I’m going to share my take on rebalancing – what it is and how it works. Then, I’m going to show what it can mean for your money.

Rebalancing: What It Means and How It Works

Technically speaking, rebalancing is the periodic adjustment of your investments to reflect market conditions that have changed. Boring… ugh!

The plain English definition is much more appealing: Rebalancing means you buy and sell specific investments that have gotten out of line with your plan in order to bring your risk down and boost your returns. (I love that part.)

Let’s look at an example…

John has $20,000 split between two investments – stocks and bonds – each representing 50% of his assets. He’s a balanced fellow and likes it that way. You probably know quite a few investors like John – who use index funds to invest just like he does, using some variation of the “set it and forget it” approach.

One year later, John finds that his stocks have appreciated by $5,000 while his bonds have fallen by $2,000. So his 50/50 split is now $15,000 in stocks and $8,000 in bonds, or 65/35. That doesn’t sound too bad on the surface because the value of his overall portfolio is now $23,000.

But John’s risks are mounting.

Because his stocks have appreciated so much, he’s got a far riskier portfolio than he thinks he does.

That’s where many investors find themselves now.

The S&P 500 is up 195.68% from their March 2009 lows through year end 2014. Anybody who’s got stocks and who hasn’t rebalanced is just asking for a repeat of 1999 – or 2007 if things roll over, or more appropriately, when they roll over.

Fortunately, the solution is very, very simple.

To get back to his preferred 50/50 split, John “rebalances” by selling $3,500 in stocks  (and harvesting gains) and buying $3,500 in bonds (which have lost value and are therefore “on sale”).

I’ve used the 50/50 structure for simplicity’s sake. But as to what your plan is, that’s up to you. I always advocate for my 50-40-10 structure we’ve talked about so many times.

But What If…?

When I talk about rebalancing I usually get a lot of questions involving hypotheticals right about now. Maybe you have a few on your mind… What if Russia blows up? What if Oil prices stay low? What if the Fed raises rates too soon? What if… What if… What if…?

Many investors struggle with day-to-day volatility because they’re terrified by news headlines and all the hype they see around them. Wall Street wants it that way, because it forces the uneducated and the uncertain to trade more, which, of course, puts fees in their pockets.

Rebalancing once a year removes this from the mix. In fact, rebalancing is also largely immune from day-to-day gyrations. Consequently, it’s one of the precious few strategies individual investors can use to their advantage when going up against the Armani Army on Wall Street, because it allows you to play offense when everybody else is playing defense.

Now let’s take a look at why rebalancing is so powerful.

The Difference Is Worth 314.86% Over 14 Years

Over the years, I’ve learned that a picture is worth a thousand words (and potentially millions of dollars), which is why I want to share one with you now. It’s one thing to talk about the power of rebalancing, but quite another entirely to see it in action.

So I constructed a hypothetical $10,000 portfolio using the Money Map Method, with annual rebalancing, and another using a simple 50/50 split between stocks and bonds that was not rebalanced.

Just to put things in perspective, I also included the S&P 500 Index.

I ran the numbers from August 1, 2000, to December 31, 2014. I chose these dates deliberately, because our markets experienced several wars, recessions, the dot.bomb crisis, two meltdowns, three meltups, the financial crisis, and a whole slew of geo-political nonsense during this timeframe.

Take a look…

As you can see, rebalancing made a tremendous difference, producing a total return of 358.03% versus the S&P 500, which offered up only 43.17%. That’s a 314.86% advantage in total or approximately 21.97% every year.

So, when should you do it?

There are all kinds of opinions, with some studies suggesting that you rebalance based on volatility, taxable gains, market conditions, or when asset classes have moved by more than a set percentage. Most of these become very complicated very quickly.

I believe in keeping things simple.

That’s why I’m a big fan of “calendar rebalancing.” Again, I recommend picking a day you will remember, like your birthday or the start of a new year. If you’re math challenged, that’s no excuse – especially when you can use one of the free rebalancing calculators you can find on the Internet.

Just be sure to do it consistently to keep fees down.

It’s worth noting that Fidelity offers 65 commission-free iShares ETFs. So depending on your specific investments, it’s conceivable that you could even rebalance for free.

And, if possible, add money to your account on a regular basis, because doing so can really turbo-charge the rebalancing process and significantly boost your wealth.

Have a great weekend.

Until next time,

Keith Fitz-Gerald

11 Responses to This Move Could Help You Beat the Market by 21.97% in 2015

  1. Cary Thoreson says:

    How do you go about re-balancing? And into what stocks, etc.. The average investor would require some guidance here..

  2. Cary Thoreson says:

    Re-balancing into what stocks, etc…

    • Keith says:

      Hi Cary. That’s a great question.

      Rebalancing depends entirely upon your personal circumstances. Right now many investors are heavily over-weighted in stocks because of the run up off March 2009 lows. So they’d logically be shunting money into bonds, commodities or other undervalued holdings to bring them in line with their intended risk profile.

      Others may view re-balancing within the context of stocks alone in which case an investor who was heavily into domestic stocks may shunt a portion of his assets into Japanese or Chinese equities that have been beaten down as a means of a) taking risk off the table and b) buying value that’s “on sale.”

      Best regards and thanks for being part of the Family, Keith 🙂

  3. juan capello says:

    Keith I always enjoy reading your write-ups and stock analysis. I have only recently joined. However, I haven’t read any of your opinions regarding bonds at this time period. Can you please deliver your thoughts on bond investments—the pros and cons if you will. I realize you can’t give personal buy or sell recs. So, just in general how you feel about bonds. Thanks Juan

    • Keith says:

      Thanks for the kind words Juan. I appreciate them very much and will do everything I can to make our time together valuable.

      I’ll tackle your question in more depth in an upcoming column but bonds are still relevant and necessary investments as part of an overall disciplined approach like the 50-40-10 I’ve outlined in today’s article.

      That said, you want to keep duration short and pick carefully because there is a lot of junk out there – pun absolutely intended.

      Best regards and thanks for being part of the Family, Keith 🙂

  4. H. Craig Bradley says:

    “EVERYMAN” IS DIFFERENT

    Instead of referring to the average retail investor as “John” ( Not a guy looking for some (casual) fun in North Portland) , or maybe Joe ( of course without a 6- PAK ). Its an everyday concept used to attempt to get a handle on the “average” guy/gal, voter, retail investor, consumer, homeowner, 24-Hour Fitness Member ( New Year’s Resolution again this Jan.). I have found in reality, there is no such thing as “average” at the individual level except as a statistical concept. Sometimes, there are however, some good stereotypes. Change is coming as the mass market further fragments and differentiates itself in so many ways.

    One example of an attempt to change with the times is Merrill Lynch “Edge” ads which portray the average young investor as “Larry” trading away on his laptop at home in a modest Mid-Western home. Outside is cold, dark, and snowy. The ad stresses the low cost of online trading and the ease and convenience of online trading with Merrill Lynch. Marketing/sales are the name of the game, as always.

    One “professional” wealth manager was quoted in Barron’s as saying what wealth management is: ” Gathering client assets and money, not so much in managing them (account)”. This is one (financial) stereotype that really fits the old-line Wall Street “Full Service” Brokerage houses like a old suit. Their client base is changing- alot.

    I think the likes of Merrill Lynch are losing clients or at the very least, not attracting so much new money. More and more, those investors that have money want to manage (control) their own portfolios- primarily with a small number of very low fee (cost) Index Mutual Funds, such as pioneered by Vanguard. Actively managed mutual funds have lost favor and paying any commission over $7.00/trade likewise. The “Full Service” Brokerages are up against the gun to keep growing assets and fees. Their days are numbered. They can not raise total return enough to count.

    The next Bull Market will finish a number of them off. I predict bank branch closings in 10 years as mobile banking takes over. I predict fewer Merrill Lynch Brokerage Branches, as well. With online technology nobody needs to go anywhere to do anything except to see their Physician for an exam ( annual physical) or to maintain (repair) their private auto. In fact, many millennials don’t want a car anymore but use Uber instead. They also want “limited government” (lower taxes). Lets see what really happens in 5-10 years.

    • Keith says:

      Hello Craig.

      You raise a number of great points. I believe that Wall Street is undergoing fundamental change that’s being prompted (finally) by technology when neither law nor regulation could move them off their proverbial rock.

      To that end, you may enjoy an excellent book entitled “Where are the customers yachts?” written by Fred Schwed. Written nearly 60 years ago, it’s a great education in the lunacy of Wall Street as we know it today. And a powerful motivator with regard to why now – more than ever – individual investors need to take matters into our own hands when it comes to building real wealth.

      Best regards and thanks for being part of the Family, Keith 🙂

  5. Doug says:

    Easy to generalize. Anyone can say, “only buy stocks that go up and you will be prosperous.” “It’s a stock pickers market this year”….”HAVE to pick only those stocks that are bound to go up double digits” See a lot of the guru’s on business channels spouting the same rhetoric. The majority of stocks recommended here that I bought are in the tank. A few went up but you could do that with a dart set and a stock chart tacked to the wall.

    • Keith says:

      Hello Doug and thanks for taking the time to share your experience.

      Rebalancing by its very nature involves stocks that have declined rather than risen in proportion to other portfolio holdings. So what you are doing is taking advantage of the capital market’s well documented upward bias when you make your move. This allows you to buy lower and sell higher over time – a proven path to both profits and wealth.

      It appears you are also discounting the importance of compounded annual returns when you say that not all your stocks have gone “up.” That’s too bad because, over time, the income from many investment choices can actually exceed the cost of your initial investment. Many investors I know long ago “paid” for their portfolio and short term volatility is nothing more than a speed bump under the circumstances as a result.

      Best regards and thanks for being part of the Family, Keith 🙂

  6. Vaidy says:

    Interesting, in your Piramid to wealth creation what are we talking, ETF funds, Bond Funds or Index Funds in each category, ot it does not matter at all?
    Thanks for reading

    • Keith says:

      Hello Vaidy and thanks for asking – that’s a great question.

      The 50-40-10 approach can work with any family of investments depending on your personal objectives and risk tolerance. It makes no difference with regard to stocks, bonds, ETFs, REITS or any other asset class as along as you a) use it constantly and b) maintain the proper target allocations. While I make very specific recommendations in the Money Map Report, you can accomplish the same thing using nothing more than a handful of ETFs if that’s your preference.

      I’ll talk more about that in an upcoming column and provide some examples, too.

      Best regards and thanks for being part of the Family, Keith 🙂

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