Shut Up, Brain: Why Investing Is a Marathon, Not a Sprint

Rob from NC posted 9 months ago:

You were able to finish the race because you STAYED in the race. "[A]llowing yourself to shift a small percentage out of stocks when you get very nervous" is dumber than dumb. People get nervous during bear markets, and that is EXACTLY the time to USE YOUR BRAIN and NOT your emotions! That is exactly the time to stay the course (and buy MORE if you can) unless the market offers you the opportunity to make tax-friendly reallocations to better equities. I get extremely nervous when the market takes a dive---and I sit there and do nothing unless I see an opportunity for better long-term gains with better equities. Just my humble opinions here.

Wayne from Wisconsin posted 9 months ago:

Regarding: "setting rules to rebalance whenever the market rises or falls by a certain amount." I have never understood the logic of rebalancing. I don't care what the percentages of assets are, other than concentrations of more than 5% of our total portfolio in a specific equity. Bonds hold absolutely no interest for me. Trying to rebalance by sector is also outside of my investment plan. The goal is to increase income by at least 10% per year with as little work as possible. Rebalancing rarely will deliver on that objective. Of course, if you hold bad or underperforming investments, then you want to "rebalance" out of them and buy something that doesn't require that type of rebalancing act.

Barry C from TX posted 9 months ago:

Wayne, me too. #1 Charles rebalances because he PRACTICES the four character traits he lists here across the breadth of his lifestyle. You can add DISCIPLINE to his list. #2 Wayne, I have read several books to try to understand the rationale of “rebalancing” portfolios. Peter Berstein’s “Capital Ideas” (2005) maybe the best in class here. #3 The origin of the concept of rebalancing goes back to the founding of the “modern” investing industry and Harry Moskowitz’s “Portfolio Theory” in 1959. His Ph D thesis considered the trade-offs between returns (measured as price increases) and risk (Markowitz defined as price variation measured using standard deviations) on equities compared to bonds, the two major asset classes. #4 Harry drew a graph a curve (by hand because graphing software was yet to be invented) that defined the trade-offs along an “efficient frontier” of all “possible” portfolios to trace how much returns and risks increased or decreased – traded off – between both types of assets at each point on the curve. Note. He only considered two asset classes and 10% intervals in 1959 due to the limitations of the computers available and the limited computational capabilities of the mini-max program, the only “software” (that had to be “read” into the computer using Hollerith cards), and the very limited access he had to a “time sharing” computer. This was a very tedious, repetitive process. #5 Although surrounded by more than a dozen economists who would eventually win Nobel prizes expanding his original research, Markowitz had to go to RAND in California to find anyone who understood his theory, the mini-max program, and programming computers. #6 When he presented his Ph D thesis to his advisory committee, Paul Samuelson told him “This is not economics,” but they granted him a Ph D in economics. #7 The mini-max program he used seeks to minimize the “risk” while maximizing return to optimize the “balance” of between these two basic asset classes. Markowitz changed the allocation ratios to find the optimum balance between asset classes by “REBALANCING” the ratios between assets classes at 10% intervals to produce a “set of portfolios” along the “efficient frontier” curve. #8 Remember this was 1959. Each 10% increment meant completely reprogramming the computer each time and waiting for a time slot to run your cards and pray there were no “bugs.” #9 This process produced Modern Portfolio Theory that launched the “modern” investing industry although it took another 10 years for any market “professionals” to notice the return/risk balance as the key to managing portfolios. In 1959 the whole industry was just a small group of “designer boutique” brokers that had been just merely guessing portfolio ratios up until then (and some still do). They “REBALANCED” the very crude (unscientific) portfolios they promoted to justify their fees. #10 Harry proposed that 60% equities and 40% bonds was the optimum portfolio to maximize return and minimize risk. It still is but people don’t respect the power and probabilities of “variation” in market prices to “unbalance” a portfolio. #11 And here we are today. #12 My experience is that very few people – even among the “professional” “certified” advisors -- understand (or even care about) how return/risk tradeoffs are calculated, how to create “balanced” portfolios, and why rebalancing DOES matter to MAXIMIZE overall returns. #13 Risk – defined as the probability that the PRICES of the assets in your portfolio will your change due the changes in the overall market (called beta) or due to the interactions among the assets themselves (called covariance) – is something very few people care about until things so south. They never research the math although we have phones that have more computing power than Harry Markowitz could have ever dreamed of. They blame their broker if they have one or blame it on a convenient favorite scapegoat. Regards.