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Investing/Strategies / Retirement Investing
|Subject: Re: 401k Adjustments||Date: 8/8/1997 5:42 PM|
|Author: TMFPixy||Number: 171 of 82310|
<<To keep it simple, suppose a mix of 80% stocks, 20% money market.
Naturally I would expect the value of the stocks to grow faster. Say I start with $8000 and $2000. Suppose the stock doubles, while the MM fund rises 10%. I now have $16000 and $2200. Adjusting back to 80-20, or roughly $14500 and $3700, seems kind of self-defeating; the original strategy counts on the 80%
growing faster, and by putting some of those profits back into MM, you lose some of the compounding effects you were hoping for all along. But of course by NOT making the adjustment, you are in a potentially more precarious position. Seems paradoxical, hence my confusion. Is that any clearer? Many thanks for your thoughts,>>
Sure. I understand perfectly. But keep in mind that asset allocation is a method of investing with a system. Any methodogy, to be effective, should be applied unemotionally and with discipline. The object is to let the head rule, not the gut. This particular method operates with the understanding that the stock, bond, and money markets in theory don't move together. As one is up, another is down, and the third is somewhere in between. The method says you pick what percentage of your portfolio you want in these markets to achieve an acceptable average return on that portfolio. Over time, the market forces things out of alignment, so you have to sell one thing to buy another in order to restore the balance you're seeking and to maintain the average return you desire.
Right now stocks are high. Your gut and your emotions tell you it seems silly to sell while they've still got upward momentum. The asset allocation system, though, says no. Sell stocks now (while they're high) to buy money market or bonds (while they're low). In other words, you're being forced to take your profits and run. Additionally, you're being forced to take the somewhat lower average return the balanced portfolio provides. Some day stocks will fall. When they do, bonds and money market will in theory profit from that fall. At that time, you'll be forced to sell them at their high to buy stocks at their low, again cashing in gains to maintain the average return. The result of all this (again in theory) is you won't suffer violent swings in your average returns and your growth will be sure and steady.
That's the system in a nutshell, and to be of value to you, it should be followed consistently. Otherwise, why use it at all?
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