The time when I re-balance my portfolio of index funds.
There’s nothing fancy about this re-balancing process.
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It’s not about stock picking (After a decade on Wall Street and several years off, it has become abundantly clear to me that casual stock-picking is a loser’s game).
It’s also not about market timing: I’m not making the changes because I’m expecting some huge short-term market moves (except for the one I describe below).
What it is about is balancing the portfolio to achieve the right balance of risk and expected return — for me, given my risk-tolerance, age, and other specific circumstances.
On this “expected return,” I should say up front that I’m not expecting much, at least not at these price levels.
- Stocks are priced to produce relatively lousy returns over the next decade (~5% or so annually, far below the long-term average of ~10%).
- Bonds are priced to produce almost nothing (and could be quite negative if inflation takes hold).
- And cash isn’t earning much of anything, at least today.
So, all-in, I expect the next decade will be another crappy one for basic investment returns.
But, still, I don’t want to hide completely in cash and bonds and get wiped out by accelerating inflation if the economy ever recovers. And I also don’t want to bet the farm on stocks and get creamed if valuations regress to their long-term means (about 25% below today’s levels).