This is the only second-half investment strategy you need

The midway point of the year is meaningless.

  • By Mitch Tuchman,
  • MarketWatch
  • Investing Strategies
  • Investing Strategies
  • Investing Strategies
  • Facebook.
  • Twitter.
  • LinkedIn.
  • Google Plus
  • Print

By now you’ve likely read a few dozen “second half” investing strategy ideas being offered online. Here’s the only one that matters: rebalancing your portfolio.

I understand why financial journalists peg these stories to the calendar. They’ve got space to fill and often there is nothing in the stock market to talk about.

Yes, there are headlines galore. Political news, interest rate news, earnings and so on.

But the fact is, there’s nothing about the midway point of a year that has any meaning at all.

And yet here they come, financial advisers happy to talk on air about the second half, big investment houses doing the same, and of course the typical meaningless stock timing calls one always sees.

Why rebalancing instead? Because time-pegged financial news leads to two key investment errors, one cognitive and one emotional.

The cognitive error here is confirmation bias. There’s a lot of math behind this at the academic level, but the basic idea is that we tend to readily believe stories that fit our own preconceptions.

For instance, let’s say you’re invested in a given stock or sector of the economy that has outperformed the market handily. You could be disposed to believe a downturn in that stock is imminent — or that more gains are ahead.

Headlines

Chances are, whatever that stock or sector is, there are headlines out there saying in explicit terms “Get out of stock X or sector Y in the second half.” Or, if you like, “Time to buy more of stock X or sector Y.”

If you want to hear either of these arguments, the internet will give you exactly that. Go ahead and type any stock symbol you like and “second half” into a search engine and see what happens.

You read what you already believe and, bias confirmed, take action. Mistake.

The other bias, the emotional one, is overconfidence. Say you have some knowledge about a given industry or a part of the economy.

Maybe you work in tech or banking. Maybe you’ve owned a given large-cap stock for a decade already and you follow its CEO closely.

It can be very hard to admit to being wrong once you’re invested in your own story of personal stock selecting skill. Maybe too hard. So the tendency is to seek out evidence that support your own theories about the second half of the year.

Here’s the thing: You’ll be right a lot of the time and wrong some of the time. But that basic pattern is true of investments in general. Your “knowledge” is meaningless at best and introduces unnecessary risk at worst.

Finding income when rates rise

These investment options could hold their own when interest rates rise.

Stocks at the index level go up most of the time. Occasionally they decline. It’s not likely that you’ll be able to game your way into owning stocks only when they rise.

In fact, full-time investment professionals spend thousands of hours trying to do this. Most fail to “guess right” the direction of the market any better than the indexes themselves.

Investment magic

And that’s the key. Because so many highly trained pros are moving huge amounts of capital around, they are in fact “the market.” Not the latest earnings forecast. Not the consensus of Wall Street analysts.

And not the completely meaningless tick of a calendar from the first six months of the year to the next six months.

Burt Malkiel, Princeton professor and author of “A Random Walk Down Wall Street”, eloquently explains rebalancing as the only near-perfect investment strategy. Malkiel is on the investment committee of my firm.

Just rebalancing a couple of times a year means you automatically sell some of your short-term winners and, in the same move, buy some of your short-term losers at a lower price.

The result, if followed with discipline, is better returns with lower risk, a kind of investment magic nearly impossible to find otherwise, as Malkiel explains.

“We all wish we had a little genie who could reliably tell us to ‘buy low and sell high.’ Systematic rebalancing is the closest analogue we have,” Malkiel writes.

Better returns follow from discipline, and discipline follows from understanding what really drives long-term portfolio returns.

Harnessing that knowledge is fairly easy, but it means letting go of dangerous biases first — and that can be hard for humans to do.

  • Facebook.
  • Twitter.
  • LinkedIn.
  • Google Plus
  • Print

For more news you can use to help guide your financial life, visit our Insights page.


Copyright © 2018 Dow Jones & Company, Inc. All Rights Reserved.
Votes are submitted voluntarily by individuals and reflect their own opinion of the article's helpfulness. A percentage value for helpfulness will display once a sufficient number of votes have been submitted.
close
Please enter a valid e-mail address
Please enter a valid e-mail address
Important legal information about the e-mail you will be sending. By using this service, you agree to input your real e-mail address and only send it to people you know. It is a violation of law in some jurisdictions to falsely identify yourself in an e-mail. All information you provide will be used by Fidelity solely for the purpose of sending the e-mail on your behalf.The subject line of the e-mail you send will be "Fidelity.com: "

Your e-mail has been sent.
close

Your e-mail has been sent.

You May Also Like...

Behind the rising costs of long-term-care insurance

Long-term-care insurance was supposed to help seniors pay for costly nursing homes and personal aides. Now the industry is imploding. Here's what's at stake for more than 7 million Americans who own the policies.

Why retirees shouldn't let market volatility scare them

What should retirees or soon-to-be retirees do during times of market volatility? Here's how to deal with an unpredictable market and the anxiety that comes with it.

Pros and cons of federal vs. private student loans

Both have advantages and drawbacks. Here's how to decide what's best for you—which could be both.