Friday, December 26, 1997
by Phred5252 (Phred5252@aol.com)
A couple of years ago, I was invited to attend a free breakfast financial seminar put on by a national firm. At the time, I didn't know very much about such matters and decided to attend. Well, the food was lousy, the host was just a little too slick and the guest speaker was speaking about things that confused me and gave me a headache. The only thing I remember is that the topic was "Asset Allocation" and that it was a complex subject better left in the hands of professionals.
I've learned a great deal since that morning and much of that is the result of finding The Motley Fool. However, that "Asset Allocation" thing is still in the back of my mind. I like to read a great deal and spend some time reading about business and personal finance.
As the end of the year approaches, much of the writing pertains to evaluating the year gone by and looking toward the new year. Well, I just finished an article on asset allocation and tuning up your portfolio. It states that many financial planners suggest that you rebalance your portfolio once a year. Essentially, you select a "target" asset allocation (perhaps 60% stocks, 30% bonds and 10% money market funds). These percentages are up to you to decide and seem arbitrary to me. If you have a great year in stocks, your percentage could increase to 70%-80% and throw things out of balance. Therefore, you need to sell off some of your winners in order to bring things back into balance.
That is where they lose me. If I am lucky enough to have invested in something that performs well, at the end of the year I need to sell because I am out of balance? I understand that there is risk involved. However, what I don't understand is why I need to sell an actual winner in an attempt to reduce the potential of risk.
For the past year, I have gone to the same restaurant on several occasions and the food has been wonderful. Do I need to visit this one less frequently and go someplace else because of the possibility of a poor meal? My car and my wife's van have both been running well this year; should we sell one because something might go wrong? What should we buy?
Maybe someone has an explanation for this school of thought. For me, I prefer to buy a fundamentally sound company, hope it becomes a winner and stick with it for the long run. The only balancing I need to do is on the tires on our vehicles.