scary recent economic history makes me scared

Rebalancing a portfolio: a commentary on the market as a whole

I am back in school. I swear this is my last degree. I had to drop out of an LL.M. Program in Taxation and Financial Services in 2013 due to illness. I am now back, with a change in emphasis to Wealth Management. Really, I went back to write my thesis on the Financial Transaction Tax v. FATCA. Not coincidentally, I am a Bernie Sanders supporter and like his plan of using a speculation FTT to fund free public college in the US.

Here is my assignment for the week: Discuss why and how often we should rebalance our investment portfolios. My answer follows. ~Olivia

In a rational market with rational economic actors, rebalancing a portfolio that is well-designed makes sense. Every quarter is probably too often. Once a year is probably sufficient under those circumstances.

As we go through our lives, though, watching one sector or another of the economy blow up, it becomes easier to predict what sector will advance in the aftermath. Dealing with fairly recent history, the 199x-2001 dot com bubble was brought home to me when my young adult son started touting websites to me as good fundamentals for stock purchases. I knew then that when people with no investing history can be convinced on such flimsy evidence to part with their hard-earned dollars that we were in big trouble. Next year, the dot com bubble burst and that party was over for a while. Two years later, I was driving through Jackson, Wyoming and saw construction cranes all over the place. I thought, “WOT?” If you know Jackson, you know that it is just a tourist town based on outdoor recreation.* But, as you know the money has to go somewhere. If it isn’t in the stock market, it’s in bonds. If it isn’t in construction, its in commodities.

It is the pressure of the money itself that makes the market move. I agree with this statement by Christopher Van Slyke, “Assuming that you know the direction of prices in the short term is a fool’s errand that has proved out many many times academically.”1

There are simply too many factors to take into account, even for sophisticated institutional actors. But one thing we can be sure of: when the stock market tanks, money flows into other areas, and those areas can be predicted and acted upon.

Something went wrong, again, in 2008. There was no good place for the money to go. There still isn’t. The machine is overwhelmed and broken. We can’t simply keep building stuff or extracting natural resources every time the markets burp up another catastrophe.

Why do I claim so blithely that the machine is broken? The US had to engage in quantitative easing for 8 years in a row. The US has not felt confident enough about the market to raise the base interest rates on government obligations. Now, Japan has gone there, into negative bond interest territory. We did not hear much about it when negative interest became common in Europe in 2014-2015.2 I do not feel optimistic about the abilities of the investor class to manage the global economy here on out.

But yes, by all means, have a solid portfolio and rebalance it annually and keep your fingers crossed.


*When, after Seattle in November 1999 it became clear to the WTO World Economic Forum OECD Bilderburg Bohemian Grove crowd that their private events, held to determine the economic fate of the world, could no longer be conducted in large cities without people indicating their displeasure, Jackson and Doha and islands and cruise ships became the best places to hatch their plots.

1. How to Balance Your Retirement Portfolio. Accessed 02-13-2016

2. Viewpoints: Why the Bond Market is Yielding Negative and What Negative Means for You. PIMCO website, accessed 2-13-2016

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