-- Published: Sunday, 10 January 2016 | Print | Disqus
By Larry LaBorde
Volumes have been written on portfolio rebalancing and in spite of that very few people bother to ever rebalance their portfolio. Most people spend more time planning their vacation than they do planning their investments. It really does not have to be that hard. All too often one falls prey to their emotions buying this or that based on a “hot tip” from their brother-in-law. The truth is investing is very boring and requires a great deal of patience. It is difficult to remove all the emotion from the equation. People panic with the herd and end up buying high and selling low unless they have a plan.
One of my favorite movie scenes is from the movie “Caddy shack” where Rodney Dangerfield is on the phone with his stockbroker while playing golf. He says “buy, buy, buy! Oh, everyone’s buying? Then sell, sell, sell…” In spite of the humor that is exactly the opposite of most people’s inclinations. The majority lose money because they let their emotions take over their investment plan.
I recommend taking the time to rebalance once a year. Of course to rebalance you need a plan. After several years many investors end up with no clear plan because they never take time to reevaluate. You can see many of the greatest investors’ plans in the book, “Master the Game,” by Tony Robbins. My personal favorite investment plan is Harry Browne’s famous “all weather permanent portfolio” which was introduced decades ago: 25% stocks, 25% gold, 25% bonds, and 25% cash; rebalance every year and leave it alone.
After many years of trying I have come to the expensive conclusion that I am not a good stock picker. I have had some really good picks in the past, but unfortunately my timing was usually too early. Churning your account is a recipe for loss in most instances. Very few traders make money competing against high speed computerized trading programs. This is where a good plan and disciplined execution comes into play. It is where you can take the emotion out of the equation as best you can. You just need to find a mix that you feel comfortable with and stick to it. For several reasons, the following is my favorite investment allocation plan:
DISCLAIMER ALERT: I am not a financial advisor and this sample allocation is for illustrative purposes only. Any funds invested should only be done after you perform your own due diligence.
25% Precious Metals
10 percent gold bullion // 10 percent silver bullion // 5 percent mining stocks
I like precious metals because they are wealth completely independent of the banking system. They are a vote of no confidence in the government and their ability to operate responsibly. I recommend holding them yourself and not in your brokerage account. If for any reason you simply cannot hold or store your own bullion then I reluctantly advise the Central Fund of Canada (CEF) as a means of holding precious metals. As for the five percent mining stocks, try to stay away from small cap mining companies, as most are long shots that end up worthless. Try a mid cap or large producer, or even a royalty streaming company such as Royal Gold (RGLD) or Silver Wheaton (SLW).
Even though the US market is overpriced by several metrics, the rest of the world seems to be worse and hot money continues to pour into the US market. I suppose it is seen as a safe haven right now. Since I am not a stock picker I advise 20 percent in Vanguard’s US 500 stock index fund (VTFIAX). It has a very low expense ratio and tracks the US market. The last five percent is where you can go wild and buy some of that stock your brother-in-law said you “have to have.” Five percent gives you enough to play without too much risk. You could put the last five percent in the Fidelity Defense fund (FSDAX). As Richard Maybury says, “War has always been a growth industry in the US.” Not to mention the world seems like a powder keg these days and all the adults are running around with lit matches. If playing in the stock market does not sound like fun then you could put all 25 percent in the Vanguard index fund and forget about it until next year.
Having a high cash allocation gives you the freedom to act on a good deal and take advantage of undervalued opportunities. Without cash you have no power to buy. My father always kept a large percentage of his wealth in cash so he could jump on once in a lifetime opportunities when they came along. I remember an equipment auction in the 1980s where Dad walked in with cash when no one had cash; there were incredible deals that everyone else had pass on. He taught me that day that without the capital to act I could watch life-changing opportunities just pass me by. Fortunes have been made buying stocks at extreme market bottoms, but it’s impossible to do so without ready cash. Place your cash in short term US treasuries, bank deposits (always less than $250,000 per bank), and keep on hand at least three to six months expenses (in small bills held outside of the banking system).
Note: High yielding corporate bonds may be something to look at in five to ten years with some of this cash. For now I don’t think the risk in bonds is worth the effort. Bonds are not paying much interest right now. If interest rates go up (they cannot go much further down) then the current bonds will pay very little interest and lose much of their original value.
You will find that your percentage allocations will ebb and flow, some go up and others go down. Once a year sell a bit of the winners and buy some more of the losers; rebalance back to the percentages in your plan. This may seem counterintuitive, but without rebalancing and sticking with your plan your portfolio will get lopsided. Past performance does not guarantee future results.
This is my plan. Spend some time coming up with your own plan, write it down and follow through. Never carve your decision in stone but practice discipline and try to stick with your plan. Sometimes things change and the plan requires adjustment, minor changes when necessary are good. What you are trying to avoid is getting caught up in the short game when you’re playing a long game.
Larry LaBorde sells precious metals through Silver Trading Company LLC. Since 2001, Silver Trading Company has offered high volume sales of gold, silver, platinum and palladium to serious investors around the world. It also offers guidance about storage options for metals. Please visit Silver Trading Company’s website at www.SilverTrading.net.
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-- Published: Sunday, 10 January 2016 | E-Mail | Print | Source: GoldSeek.com