"What's the simplest strategy to boost my returns?"
This is one of the most frequently asked questions I hear when I'm on the road. And most people expect a long, drawn-out answer.
But in reality, there's a single word - the one you're about to see - that can lead to huge performance gains...
Try triple-digit huge - that's why I place a high priority on this technique in the Money Map Report's proprietary 50-40-10 Strategy. It's critical to the success tens of thousands of our subscribers have enjoyed over the years.
It's incredibly simple, too...
Rebalancing: Your "Buy Low/Sell High Guarantee"
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 deceptively 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.
What I positively love about rebalancing is that it can lead to greater profits, even if the markets drift lower. Not too many strategies can do that.
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 millions. 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.
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.
A 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 markets have run up 150.9% from their March 2009 lows, as of September 24, 2013. 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").
But, but, but...
I usually get a lot of questions involving hypotheticals when I'm discussing rebalancing right about now. Maybe you have a few on your mind... What if Obamacare gets defunded? What if the debt ceiling debate fails? What if the Middle East blows up? 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 to trade more, which, of course, puts fees in their pockets.
Rebalancing 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, because it allows you to play offense when everybody else is playing defense.
The Difference Is Worth 248%
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 Aug. 1, 2000, to Sept. 23, 2013. Â 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 political nonsense during this time frame.
Take a look...
As you can see, rebalancing made quite a difference, producing a total return of 292.16% versus the simple 50/50 non-rebalanced alternative, which turned in 44.09%, and the S&P 500, which offered up only 18.34%.
The merits of rebalancing are clear.
So, when should we 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.
Keeping things simple is far easier.
That's why I'm a big fan of "calendar rebalancing." 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 found 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.
I'll be back with more Marketology soon to talk about doing just that.