Investment Portfolio Rebalancing

Is it important to rebalance your investment portfolio?

There are a number of suggested formulae: Keeping the ratio of stocks and bonds in your portfolio at 50%/50% or 60%/40%, and so on. What is optimum is variable, depending on many personal factors.

You hear about periodic rebalancing when that ratio changes due to market moves. But how does it improve your investment success?

The truth is, rebalancing the ratio of stocks and bonds owned, is one of over 1,500 investment strategies I have investigated. It has not always been a profitable strategy for all types of stock or bond markets. It can cause overall losses, as it did in the 2008 and early 2009 financial meltdown, as well as some past cycles.

My suggestion: Evaluate your common stock and bond securities holdings in a flexible manner and not as a set ratio, depending on your age, total assets and retirement outlook.

Plus your disciplined investment strategy plan. Furthermore, helter-skelter portfolio adjustments can cause serious tax charges in non-retirement accounts. ( See the Earl J Weinreb NewsHole® comments.)

Gold as Inflation Hedges

Further to my comments on gold as an inflation hedge:

For those interested, gold purchases come in different forms; ETF securities, or plain coins, rare coins, and bullion, all of which must be safely stored in bank vaults or at home.

Costs are involved; gold earns no interest. (Gold can be bought as mining company shares but that entails securities’ risks.)

Gold is a good holding in dire emergencies, in rare coin form, for example. But it can be erratic as a holding.

When the dollar weakens, ( or the Euro) gold goes up. When the dollar or Euro) stabilizes in relation to other currencies, gold prices possibly fall. Some times sharply. And often gold moves with market anxieties, or supply/demand, more than mere inflation.

So be careful holding gold, as with any other investment you may have. Never treat it as a panacea to offset brutal inflation. As I often say, there are alternatives. ( See the Earl J Weinreb NewsHole® comments.)

Investing in Gold

Gold prices usually rise as dollar values look suspect. But look at gold prices over the years. The price today is still close in purchasing power to what it was at the highs of the 1980’s. With simple compound interest, gold ought to be much higher.

And recent price weakness has shown how much of a common commodity it can be at times.

Most of the advertisement claims for buying gold sound good. What with inflation a certainty as a result of enormous budget deficits. Gold is an apparent inflation hedge.

You can be sure the political pressures on the Federal Reserve will make it hard for the Fed not to monetize the huge debt.

But there are better inflation hedges. ( See the Earl J Weinreb NewsHole® comments.)

Tax Bills of Fund Investors

Further to my previous discussion of the advantage of low-cost mutual funds:

A 2008 Lipper study discovered that buy-and-hold investors with mutual funds in taxable accounts lost to taxes between 1.3% to 2.2% of their annual returns over the previous 10 years. Minimizing the impact of taxes should therefore be an investor priority in fund selection.

One way to minimize a tax bill is to invest in tax-efficient funds that distribute little capital gains. Exchange traded funds, or ETFs, can help lower distributions. (See the Earl J Weinreb NewsHole® comments.)

Lower Costs For Investment Gains

Studies prove that investment cost is one of the most important factors for investment performance. Mutual funds with high expenses usually provide poorer market performance.

Therefore, select funds with the lowest management fees and expenses.

Costs include fund brokerage charges that are not included in your fund's expense ratio. The cost of buying and selling securities is passed on to you. So, it's advisable to stick with mutual funds that have low transaction volume. ( See the Earl J Weinreb NewsHole® comments.)

Financial Future Planning

Predicting the financial future is difficult, perhaps impossible. Complex factors and contingent possibilities always are bound to produce never contemplated or imagined events.

Only politicians are certain they can foresee the future. We know how successful they are.

Be flexible in your financial planning. Prepare for various possibilities. I know you get lots of advice, including charts and math models. They look good, But they’re not practical.

Flexibility enables you to make the necessary planning changes that will cover events as they occur. ( See the Earl J Weinreb NewsHole® comments.)

Investment Diversification

Investment diversification is achieved only to an extent by the quantity of securities within the portfolio. It’s accomplished mostly by the asset classes in the mix, as well geography.

Many investors buy several mutual funds and then believe they are adequately diversified. But they merely often have duplicated much of their portfolios, adding the same securities with each fund holding.

I find that indexed funds or exchange traded funds (ETFs) provide full diversification, and at lower cost. ( See the Earl J Weinreb NewsHole® comm

TIPS and Inflation

Why buy TIPS? I have never considered TIPS a valid bond inflation advantage, despite the publicity they receive in the financial media.

They are bonds issued by the federal government through a bank, broker, or the Treasury, for five, ten and twenty year maturities. Their value grows to the extent of inflation. TIPS also can be bought as mutual funds and ETFs.

TIPS investors seek inflation protection more than interest, which is low. With little current inflation, returns are insignificant and actually negative. They’re bought for potential inflation.

State and local taxes do not apply on U.S. Treasury obligations. However, additional interest paid because of inflation will be subject to federal taxes.

Moreover, TIPS have been bid up by public demand, in excess of their true value for vaunted inflation protection.

And you can get inflation protection elsewhere. Even with other bond funds, yielding much higher returns. You get that protection in diversified low-cost bond funds with shorter duration, that reinvest their income.

I constantly refer to duration, which the financial media unfortunately and ignorantly tends to overlook. ( See the Earl J Weinreb NewsHole® comments.)

Risk of Investing

Standard deviation is a fancy term used by financial analysts looking at risk in investment portfolios. It’s a term that need not concern individual, non-professional investors. It’s the return you get from gains and losses you may expect about two thirds of the time over a year.

What are investment risks? A well designed portfolio will consider your acceptable risk. or risk tolerance.' Your investment time objective, age, personal psychology and investment goals are other considerations.

Who will be managing your portfolio? Investors should subject themselves to consideration of manager risk. They do this by choosing an investment portfolio that's fully and actively managed. But what happens if your investment manager leaves or fails to do as well as in the past? That is manager risk and it can't be measured by statistics alone.

I recommend mutual funds or exchange traded funds (ETFs). Better still, I always suggest non-managed funds, those indexed to foreign and domestic standards you want to emulate, such as the S&P 500, as one example.

Paying 1 1/2% of your assets as a minimum charge to investment advisers can represent as much as 20% or more of you annual investment income. That’s stupidity; you will be receiving little practical advice in return.

I never recommend advisers unless you need a tax accountant, lawyer, and/or an estate specialist. (See the Earl J Weinreb NewsHole® comments.)

Why Not Universal “Cash for Clunkers”?

Demand economics is Keynesian in theory. And it eventually teaches basic economics lessons that left-leaning politicians ought to learn, but never do. If it worked for cars, it would be a bonanza for the rest of the consumer economy. It would then work for houses, refrigerators, what-not.

But it didn’t work at all.

The automobile cash for clunkers program was slated to fail for a multitude of reasons. I mentioned them early on in my blogs.

The misconceived plan had disrupted the new car, the used car, and the scrap metal markets. As predicted here, it never added to the net amount of economic outlay. Plus, it cost taxpayers billions.

Furthermore, it set a bad example of government meddling, that accomplished lots of governmental mischief as a form of state capitalism. ( See the Earl J Weinreb NewsHole® comments.)

Buying Gold More Cheaply

I am not automatically a proponent of buying gold. It’s a strategy for investing against currency weakness but has not been great as an inflation protection hedge.

But if you do buy gold, think of buying gold mining stocks where the gold can often be bought cheaper and you have income. Gold itself is sterile; it produces no income and pays off only when and if sold for a profit. ( See the Earl J Weinreb NewsHole® comments.)

Annuities of All Kinds

Annuity purchasers are not totally familiar with their varieties. They know only what salesmen suggest. Most are commissioned salesmen and not truly independent advisers.

Buyers of such policies should know the varieties that are available. That begins with the conventional annuity guarantees; a fixed amount of income that returns both a return of principal as well as interest. Those “high returns” can be misleading.

Also, there is no hedge against inflation in a conventional annuity. You get fixed amounts, though the dollar’s value is constantly diminished by ongoing inflation.

Then there are variable annuities or equity-indexed annuities. Returns are expected to be higher than that of a standard, fixed annuity. The return is variable because it’s tied to the Standard & Poor’s 500 Stock Index. (Other methods may be used and can be controversial. )

Downsides of annuities that many investors overlook include steep early surrender costs and charges for insurance that buyers may not need. ( See the Earl J Weinreb NewsHole® comments.)

Recessions and Role of Psychology

The media constantly overlook the role of psychology.

Poor psychology is primarily what gets us into recessions once the basic excesses take hold, and eventually, it gets us out. Certainly, psychology gets us into those excesses, which produce booms that cause busts. It helps foster those ever-downward economic spirals.

There was certainly a subprime mortgage mess. But that was accentuated by a jittery market that affected the pricing of those assets. (I have often commented on this.)

With the downturn, political psychological efforts succeeded, especially aggravated when banking asset values dropped, by forced mark-to-market pricing.

Much of what happens is our perceived outlook on the economy’s future. The lack of proper media explanation adds to this. ( See the Earl J Weinreb NewsHole® comments.)

Dollar Hedging Overseas

When the dollar is weak, gains in stocks and bonds overseas are worth more in dollars. When the dollar strengthens, any gains overseas in stocks, bonds and currency holdings will be worth less in terms of dollars.

However, I never recommend such investments, or more precisely, this method of trading. It’s speculative and often too much a market-timing strategy for me to suggest for the average investor. ( See the Earl J Weinreb NewsHole® comments.)

Outsmarting the Other Traders

Frequent trading is tough for small traders. Heavier trading volume helps you compete, along with proper math models. Assuming you have the models, big-trader packaged securities help accomplish the job.

Furthermore, buying/selling spreads kill you. The average spread on the NYSE’s electronic Arca platform is about 3 cents for larger capitalized stocks and as much as 9 to 10 cents for the smaller caps. You are thus looking for gains in pennies.

This is a tough game for amateurs. Yet, they never stop trying to beat the odds. ( See the Earl J Weinreb NewsHole® comments.)

Dollar-Cost as Investing Strategy

Dollar-cost averaging is a valid strategy for buying securities. Whether it ought to be used usually depends on the volatility of the markets. If the market for a security is trending up, dollar-cost averaging can prove more costly. If the market tends to be volatile, or erratic, dollar-cost averaging procedure will result in lower-cost.

There is also evidence against its employment. Still, dollar-cost averaging continues to be used by investors and is recommended by most financial advisers.

Moreover, it has psychological appeal when an investor has to commit to a large purchase and prices are erratic from day to day.

Also, the popularity of dollar-cost averaging comes from examples that show its use results in greater stock holdings across the stock market cycle, compared to a one-time, lump-sum investment. ( See the Earl J Weinreb NewsHole® comments.)

Reading About Investing

The media always suggests books that purport to be the ultimate solution for making millions in the stock market. You get new best sellers on how authors made their millions.

Much of the advice is impractical, if not downright nonsense.

I have commented on this in the past, reflecting my research on the subject.

If there were a securities bible. it would be the book, Intelligent Investor, by Benjamin Graham, and his earlier works. However, very few who say they are Benjamin Graham investors, have read or follow the advice of Benjamin Graham.

For further information, I would suggest my Earl J Weinreb NewsHole® comments, along with material at www.newshole.com

High-Frequency Securities Pricing

Traders use powerfully fast computers and special software to trade securities. This makes it possible to get ultra efficient pricing when buying and selling securities.

Advantages accrue to the system, which can indirectly benefit small investors who have accounts with institutions such as mutual funds and pension funds.

Politicians often complain that such trading hurts small investors. Some traders complain about alleged effects on conventional trading.

That is the extent of all the noise you hear, other than the populist ignorance of politicians. ( See the Earl J Weinreb NewsHole® comments.)

Properly Investing in Corporate Bonds

We know that bond prices drop whenever interest rates go up or there is a specter of upcoming inflation; whenever cycles appear in the corporate bond market or the economy.

But that does not mean you should avoid or sell your bonds and run for the hills.

The financial media always takes these symptoms as a cue to get out of bonds or an excuse for buying I Treasury bonds or TIPS, the so-called protection against inflation.

I have constantly commented on this subject, advising how to wisely use DURATION as a tool for overcoming and actually profiting from inflation, using corporate bonds. ( See the Earl J Weinreb NewsHole® comments.)

Blaming Wall Street For Political Errors

When the Obama administration, the media, and the public, often in ignorance, look for a suitable scapegoat for government shortcomings, they blame Wall Street for financial and business problems.

Hedge fund mangers are the principal targets. Though the very underpinnings of financial problems come from governmental missteps.

Many on Wall Street may do stupid and sometimes venal acts. But not all are culprits, as painted by politicos or the majority of the media.

The obligation of any investment manager, including those of hedge funds, is to get the best return they can for their investors. They have a fiduciary duty to look after their clients’ money, whether they be rich individuals, or pension funds, even members of private and public industry unions. ( See the Earl J Weinreb NewsHole® comments.)

Why Buy New Stock Issues or IPOs?

Research consistently shows that new underwritings generally are no bargains for investors; that they come to market overpriced.

Though there are SEC regulations against over-hyping of securities in the period just before and during securities registration, the financial media often builds on pertinent news to a fever pitch for “hot” issues.

The result is an auction atmosphere for opening prices. Often, many soon cool. ( See the Earl J Weinreb NewsHole® comments.)

Economist Political Opinions

In the midst of a deep global recession, becoming as the 1930s, we see government useless Keynesian pump-priming and stimulus budget-busting that will eventually induce extraordinary inflation.

Despite past experience, it’s interesting to see that there are still some economists who feel governments are not spending enough to get out of their economic doldrums.

There has to be some rationale for such thinking. Often it has to do with personal politics. Economists often weigh the pros and cons of their positions, and may never fear the consequences of what they suggest, if it suits their political leaning. ( See the Earl J Weinreb NewsHole® comments.)

Outwitting Other Investors

Most investors try to outwit each other all the time. They buy stocks they feel will beat the market. To do so they study information that hundreds of thousands, maybe millions of others read. So they are not getting genuinely exclusive wisdom.

And they often pay advisers too much, when those advisers are in the same situation, looking for scarce nuggets of securities wisdom that are being picked over by the public.

And when investors buy, they are getting what someone else is selling. Maybe someone just as smart an investor as the buyer, or his adviser.

As for knowing when to buy or sell, research shows that no one has ever been able to accurately time the markets. Unless they have illegal inside information.

The best solution? Invest in low cost index mutual funds and exchange-traded funds, or ETFs ( See the Earl J Weinreb NewsHole® comments.)

Thrift Savings Plan (TSP) For Public Service Employees

The Thrift Savings Plan or TSP, administered by the Federal Retirement Thrift Investment Board, was created for U.S. civil service employees and uniformed members of armed services. Individuals can make contributions to retirement savings.

The program is a part of the Federal Employees Retirement System, or FERS. Others include the FERS annuity and Social Security.

TSP is designed to closely resemble what’s available in the private sector with tax deferred 401Ks. It is also open to employees covered under the older Civil Service Retirement System or CSRS.

There are five funds; all can be selected in varying amounts, including a diversified mix in the S&P 500; a mixture of corporate and treasury bonds; an index of developed foreign country markets. and a set share price of a money market fund, tied to intermediate treasury bonds. ( See the Earl J Weinreb NewsHole® comments.)

Stock and Bond Investments

Most investment advisers are not certain how much stocks and bonds go into what can be considered a “balanced” investment portfolio.

What had been a simple assumption prior to the 2008 financial meltdown is now subject to conjecture. That’s due to the fact both stocks and bonds can fall in unison, and they may recover differently.

As in the past, the 60% stocks and 40% bonds formula may not be standard any longer. And changes in formulae adjustments as investors age, may no longer hold.

The solution calls for more flexibility because there is no set stocks/bonds formula for an investor to use; many factors affect choices.

Upcoming inflation, retirement age and health of both investor and beneficiary, all come into play. Plus, the possibility that bonds may return more than stocks in coming years. ( See the Earl J Weinreb NewsHole® comments.)

Mutual Fund Costs

I always tell investors to look at costs of mutual funds. I invariably advise index; that is, unmanaged funds, or Exchange Traded Funds (ETFs).

Several problems persist with managed funds, aside from the fact managers often cannot do as well as the indexes they are supposed to follow.

One, is that they trade too often. The average turnover of a portfolio each year can be 100%. Some funds run much higher.

Less trading costs are important, in addition to lower management fees. And remember, trading produces bid/ask differences, and more tax bites. ( See the Earl J Weinreb NewsHole® comments.)

Financial Moral Hazards

The Obama administration and Democrats always attempt to undertake measures to prevent future financial meltdowns. They feel they are expert in their attempts to regulate whatever is required to maintain financial stability.

The Dodd-Frank Act of 2010 is a prime example.

However, suggested remedies will fail. All they will accomplish is the message that Washington is doing something. In that respect, politicians are doing what is expected politically by uninformed masses. But financially, government will be making a mess of things.

By creating super regulation, all the bureaucrats set up are moral hazards. They give investors ill-conceived confidence that markets are mistakenly being well supervised and secure. So investors will take bigger risks.

Regulators give investors the impression the latter will be bailed out if the financial system runs into a debacle. The ever-bigger-risk cycle will continue.

Moral hazards are what helped the recent financial meltdown to occur, with institutions “too big to fail.” So-called “bailouts” did not work as promised. The new regulations will still exaggerate problems. ( See the Earl J Weinreb NewsHole® comments.)

Stock Market Expectations

Some experts still offer evidence that stocks will remain a good long-term investments. Other observers have added to this optimism.

Studies do show that whenever stocks are off very much from their highs, future returns are usually better. That doesn't guarantee short term performance, but improvement can be expected over time.

However, this longer view can be suspect under present economic conditions.

The role of inflation due to our tremendous budget deficits, plus higher and higher taxes, and the crowding out of private capital investment, can easily hamper securities market projections.

Further securities market advances will depend on corporate earnings growth. They will be problematical with government spending and borrowing that will usurp the private supply of needed capital. ( See the Earl J Weinreb NewsHole® comments.)

Short Selling Securitie

A short sale occurs when a trader borrows shares, which he then sells. The loan is repaid for less money if all goes well.

Share prices rise and fall as a firm's earnings move, but other influences move stock, including speculation about where the company is heading.

To intentionally manipulate security prices is illegal. But Wall Street pros believe short-selling raids do occur. Two experts have described their theory of how such manipulation may have worked when the Bear Stearns investment company got hit by disaster.

Wharton finance professor Itay Goldstein. and Alexander Guembel of the Saïd Business School and Lincoln College at the University of Oxford described the procedure in their paper entitled, "Manipulation and the Allocational Role of Prices."

Their finding claimed traders purposely drove the Bear Stearns stock price down and undermined the corporation’s reputation and condition, and caused the share price to fall sharply. Goldstein and Guembel found that such intent works when the idea is to damage a firm; Ordinary traders do not have the same power.

Bear Stearns was finally sold out to the Chase Bank after corporate damage was accomplished by the poor market psychology of this short selling. ( See the Earl J Weinreb NewsHole® comments.)

Unused Credit Cards in Wallet

Lots of unused credit cards in your wallet, for which you have no use, could be a problem.

You may already use a number of cards, maybe those that give special discounts or privileges.

A zero balance on your credit card won't hurt your FICO score. (The FICO is a copyrighted score that is used by about 90% of the largest banks for their credit decisions.)

Closing an account could hurt your credit standing. If you continue not to use the card, the bank may cancel it, or charge for it due to inactivity.

Your balance-to-limit ratio, may increase as a result of closing the account. That may also cause a decline in your credit score.

Try using little-used cards, even semi-annually, to prevent closure by banks. That could help your credit score. Use the card to make small purchases. Be sure to pay any balances off each month. ( See the Earl J Weinreb NewsHole® comments.)