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Subject:  Re: Poll: How much do you want to FIRE? Date:  2/1/2005  10:53 AM
Author:  ziggy29 Number:  3043 of 5245

>> I am not sure what I want, but I don't like the overall overvalued market. <<

Well, this is why I've been following a strict asset allocation model with index funds and ETFs. Between the tendency of asset classes to "mean revert" over time, and holding non-correlated assets that tend to rise and fall separately, you can reduce overall volatility *and*, through periodic rebalancings, sell some of what's "overheated" and use the proceeds buy more of what has been depressed.

For example, I sold about 1/5 of my REIT holdings when I rebalanced on December 31 because they rose from my target 8% of assets to over 10% during 2004. I used the proceeds to buy other asset classes which hadn't performed as well (mostly bonds and large-cap U.S. stocks). So while I'm getting hit by the putrid performance of REITs so far in 2005 (down almost 10% in the first month), by rebalancing I protected -- and took -- a fair amount of the gains off the table, so to speak, and plowed it in other areas which weren't as overpriced (as gauged by performance in the previous year).

It works. The beauty is that when you sell once a year, you're selling the more "expensive" stuff and buying cheaper stuff -- which, given the tendencies of asset classes to mean-revert over time, increases return AND reduces volatility.

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