What I'm about to tell you could be the most important investing tip you get this year -- even better than if I gave you the name of some race-car growth stock that might double in 2010. But for you to appreciate its importance, I need to tell you two true stories.
True story No. 1
2007 had been a flat year for the market, but we started getting signs at the end of the year that all was not well with the housing market. The S&P took a sharp 10% dive from October to December and newspapers were reporting more and more about a looming "subprime" crisis. Yes, Ben Bernanke cut interest rates, but by the end of 2007, though the scale of the eventual crisis was not yet clear, it was obvious that there were at least a few weak links in the financial sector.
It was at this time that I took a look at my portfolio and realized that I was more than 25% weighted in the financial sector stocks such as Berkshire Hathaway
Before you call me daft, let me explain how such a thing could happen. First, financial sector stocks were coming out of a period of healthy growth, and my holdings had grown in size from their original positions. Second, financial stocks generally look like attractive buys because of their asset-light business models and high returns on capital. And third, I hadn't paid attention to my overweighting in real-time because these companies weren't operating in the same parts of the financial sector.
Yet overweight position across financials scared me when I saw it at the end of 2007 since my outlook for financials in 2008 wasn't all that rosy.
What happened? I rebalanced my portfolio by selling some of my financial stocks and saved myself a lot of pain as a result.
True story No. 2
Fast-forward to the end of 2008. The entire stock market had dropped nearly 50% and stocks with higher risk profiles -- such emerging markets names -- were down even more than that.
As a consequence, when I looked at my portfolio, I realized I now had less than 10% of my money invested in emerging markets even though I believed countries such as China, India, and Brazil were going to lead the world into recovery in 2009. After all, these countries were still posting positive GDP growth and had attributes -- such as a higher savings rate in China, a younger population in India, and a wealth of natural resources in Brazil -- that seemed like they could better help them survive and perhaps even thrive through the downturn.
So what did I do? I rebalanced my portfolio by selling some U.S. stocks and buying more shares of promising emerging markets names such as America Movil
As you can see from the returns below, my emerging markets thesis played out as expected and my decision to buy more of those stocks helped make my returns dramatically better than they would have been otherwise.
|
Stock |
2009 Return |
|---|---|
|
America Movil |
55% |
|
Mercadolibre |
217% |
|
China Fire & Security |
103% |
|
Yongye International |
425% |
The New Year's No. 1 investing tip
Now that you know those two true stories, I hope you can appreciate the importance of taking time at the end of each calendar year to take a close look at your portfolio and your asset allocation to make sure that it matches your expectations for the next year and beyond.
If it doesn't -- and this is the most important part -- then make sure you take the time to rebalance. Not only could rebalancing save you a lot of pain (as it did me in 2008), but it can also help you make a lot more money (as it did me in 2009).
At Motley Fool Global Gains we recently released our updated asset allocation guide for 2010 to our members. It tells you what markets you need to own in 2010 and how much of them. But it doesn't stop there. It also reveals the specific stocks and funds we believe are the best ways to play each country, region, and market around the world.
To get your own copy of that report and get your portfolio on the right foot for what is sure to be an exciting investment year, simply click here to join Global Gains free for 30 days. There is no obligation to subscribe.
Tim Hanson is co-advisor of Motley Fool Global Gains. He owns shares of Berkshire Hathaway, optionsXpress, International Assets Holding, America Movil, and Yongye International. America Movil is a Motley Fool Global Gains recommendation. Berkshire Hathaway is an Inside Value and Stock Advisor selection. OptionsXpress is also a Stock Advisor pick. MercadoLibre is a Rule Breakers pick. The Motley Fool owns shares of Berkshire Hathaway and our disclosure policy wishes you a profitable investing year.
