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Author: emma06 Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75339  
Subject: Handling stocks in an IRA Date: 2/26/2002 2:26 PM
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As a retiree with a diversified portfolio I was curious how us older folks handle buying and selling of stocks in and IRA. Are we all of the buy and hold theory ? Do any of you sell some shares in their winning stocks to take profits, only to buy back in when the stock dips below the previous sell price ?
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Author: WPatch Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 33891 of 75339
Subject: Re: Handling stocks in an IRA Date: 2/26/2002 5:56 PM
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I, for one am a quarterly trader in stocks. I buy momentum stocks. I tend to keep winners, sell losers. I use mechanical investing for 1/2 of portfolio, mutual funds for balance. I lost big in bear market, but trading profits were high in 98 and 99 so I'm even, thanks to big gains in Vanguard Health Care Fund. I expect bull market to return in force.

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Author: rkmacdonald Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 33893 of 75339
Subject: Re: Handling stocks in an IRA Date: 2/26/2002 8:32 PM
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Author: emma06 Date: 2/26/02 2:26 PM Number: 33888
As a retiree with a diversified portfolio I was curious how us older folks handle buying and selling of stocks in and IRA. Are we all of the buy and hold theory ? Do any of you sell some shares in their winning stocks to take profits, only to buy back in when the stock dips below the previous sell price ?

Most successful investors will tell you not to try to time the market.

Since you mentioned that you have a diversified portfolio, then you must have a chosen asset allocation (at the minimum a percentage of stocks vs. bonds).

The general rule for a diversified portfolio is to rebalance it regularly to maintain the target asset allocation percentages. Most people rebalance on a yearly basis.

The reason for rebalancing on a regular basis is that it forces you to sell some of the assets that have appreciated to buy more of the assets that have gone down in price. This has the important effect of 'Buying Low and Selling High' that many people only dream about.

You should also rebalance the stock portion of your portfolio as well. For instance, if you have ten stocks, and you decide to put 10% of your equity money into each one, then at rebalance time, (after careful study to determine that these are the same ten stocks you want to hold for another year),you should the gains on the winners to buy more of the losers. Again, this forces you to buy low and sell high.

I highly recommend that you read William Bernstein's book, 'The Intelligent Asset Allocator'.

RK

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Author: Hyperborea Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 33895 of 75339
Subject: Re: Handling stocks in an IRA Date: 2/28/2002 6:23 PM
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The general rule for a diversified portfolio is to rebalance it regularly to maintain the target asset allocation percentages. Most people rebalance on a yearly basis.

The reason for rebalancing on a regular basis is that it forces you to sell some of the assets that have appreciated to buy more of the assets that have gone down in price. This has the important effect of 'Buying Low and Selling High' that many people only dream about.


Though here the momentum effect can also be the allocator's friend too. The studies that I've seen have suggested that rebalancing once a year, as you suggest, or even every other year can bring additional, though small, gains over more frequent rebalancing. The basis for this is that momentum will carry an asset class in the same direction for the following period it has been moving over the past period. The range of time that this momentum effect is valid seems to die out after about 2 years.

You can verify this yourself by computing the self-correlation of the movement of a particular index or asset class though I'm not sure if it applies to individual stocks. The self-correlation is correlation of the returns of an asset class at time t with the returns of the same asset class at time t+1 over all applicaple values of t.

Hyperborea

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Author: rkmacdonald Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 33896 of 75339
Subject: Re: Handling stocks in an IRA Date: 2/28/2002 9:45 PM
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Author: Hyperborea Date: 2/28/02 6:23 PM Number: 33895
here the momentum effect can also be the allocator's friend too. The studies that I've seen have suggested that rebalancing once a year, as you suggest, or even every other year can bring additional, though small, gains over more frequent rebalancing. The basis for this is that momentum will carry an asset class in the same direction for the following period it has been moving over the past period. The range of time that this momentum effect is valid seems to die out after about 2 years.

You can verify this yourself by computing the self-correlation of the movement of a particular index or asset class though I'm not sure if it applies to individual stocks. The self-correlation is correlation of the returns of an asset class at time t with the returns of the same asset class at time t+1 over all applicaple values of t.


Momentum is one topic that I am a little skeptical of. There are those investors who swear by it, but then, almost all of the more highly educated professors and financial experts (like Burton Malkiel, Jeremy Siegel, and William Bernstein) will say there is nothing to the momentum investing theories.

Momentum is really one of the simplest forms of technical analysis. The primary principle of technical analysis is that all information about earnings, dividends, and future performance of a company is automatically reflected in the company's past market prices. However, in Burton Malkiel's book, 'A Random Walk Down Wall Street', he skillfully attacks and destroys the concept of momentum.

Can you direct me to any books by reputable (educated) authors who can prove that there really is momentum in the stock market?

RK

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Author: Hyperborea Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 33897 of 75339
Subject: Re: Handling stocks in an IRA Date: 3/1/2002 2:20 AM
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Can you direct me to any books by reputable (educated) authors who can prove that there really is momentum in the stock market?

Two easy to access articles are in William Bernstein's newsletter, Efficient Frontier, in the September 1997 issue - Mean Reversion and You and in the January 2000 issue - Case Studies in Rebalancing. From the second of the two Bernstein writes:

"This is a fairly tedious table, but cursory examination shows that for almost all periods studied there is a monotonous improvement as one increases rebalancing period, except that there seems to be little difference between annual and quarterly rebalancing. (And for those of you who are hard core stat nuts, except for annual/quarterly pairwise t tests between all of the periods are highly significant.) The reason for this is fairly obvious. Asset class returns are not a perfect random walk. If they were, then there would be no profit to rebalancing. After all, rebalancing amounts to a bet that last year's above/below average return will reverse next year. If this is not the case, then there is no sense in rebalancing. There is overwhelming evidence that there is short-term persistence in asset class returns, so it is a good idea not to be too hasty pulling the trigger."

Another source though not so accessible (it's harder to find a copy) is Michael Edleson's book Value Averaging. He discusses the correlation of returns from one period to the next and the use of such a correlation in choosing a rebalancing time frame. This study was done much earlier than Bernstein's and has similar results. For example he shows that in 767 monthly periods of the US stock market we had the following returns:
Last/Current              ABOVE AVG                          BELOW AVG
ABOVE AVG 222 178
BELOW AVG 179 188

So of the total 767 months 222 were above average AND preceded by an above average month etc. Strong evidence of short term momentum. Longer periods show less and less so the momentum disappears over time and we revert to the mean.

Finally, for more academic work you could try: James M. Poterba and Lawrence H. Summers, "Mean Reversion in Stock Prices: Evidence and Implications", Journal of Financial Economics, 22 No. 1 (1988) pg 27-60

Hyperborea

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Author: rkmacdonald Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 33913 of 75339
Subject: Re: Handling stocks in an IRA Date: 3/1/2002 4:38 PM
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Author: Hyperborea Date: 3/1/02 2:20 AM Number: 33897
Two easy to access articles are in William Bernstein's newsletter, Efficient Frontier, in the September 1997 issue - Mean Reversion and You and in the January 2000 issue - Case Studies in Rebalancing. From the second of the two Bernstein writes:

"This is a fairly tedious table, but cursory examination shows that for almost all periods studied there is a monotonous improvement as one increases rebalancing period, except that there seems to be little difference between annual and quarterly rebalancing. (And for those of you who are hard core stat nuts, except for annual/quarterly pairwise t tests between all of the periods are highly significant.) The reason for this is fairly obvious. Asset class returns are not a perfect random walk. If they were, then there would be no profit to rebalancing. After all, rebalancing amounts to a bet that last year's above/below average return will reverse next year. If this is not the case, then there is no sense in rebalancing. There is overwhelming evidence that there is short-term persistence in asset class returns, so it is a good idea not to be too hasty pulling the trigger."


Very interesting - thanks. I had never thought of rebalancing like this. I highly respect Bernstein's work.

RK

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