Home' Trinidad and Tobago Guardian : August 17th 2014 Contents AUGUST 17 • 2014 www.guardian.co.tt SUNDAY BUSINESS GUARDIAN
PERSONAL FINANCE | SBG17
Investors who wish they were better at buying low and
selling high actually have a tool that can force them
to do just that. It s called "rebalancing", the practice
of regularly re-allocating a portfolio so the investments
in it stay in their originally intended proportions.
A 60 per cent stocks-40 per cent bonds portfolio will get
out of kilter if you leave it alone long enough. To rebalance,
you have to cut back on the portion that grew---typically the
stocks---and add money to the other side.
An investor who does that regularly will protect herself from
taking more risk than she intends. She also will often lock in
gains and buy securities at better prices than she might oth-
Last year---a boom year for stocks and a bad one for bonds---
provides a classic example of why investors need to rebal-
If you started 2013 with a US$100,000 portfolio invested
in two funds: one 60 per cent invested in Standard & Poor s
500 stock index and 40 per cent in Barclay s Global Aggregate
Bond Index, via exchange traded funds, you would have ended
the year with a much more aggressive stance: 68 per cent
stocks and 32 per cent bonds.
Rebalancing is easy for workers who invest through their
company 401(k) plan. A one-fund programme, such as a target
date retirement fund, will be regularly and automatically rebal-
anced by its managers. Large company retirement plans often
let workers leave standing automatic rebalancing orders, so
their portfolios can be adjusted quarterly or annually.
That works especially well for retirement investors because
there are no tax consequences to their rebalancing efforts.
But individual investors who have non-retirement portfolios
of their own have to work harder to make rebalancing work.
That s because their trades often involve some transaction
costs and some tax consequences. And because they may have
to rebalance manually, instead of on autopilot.
Here s how to do it best.
Don't just stick with the calendar
This year tells a different story. With the S&P 500 up 4.43
per cent and the bond index up 5.51 per cent, asset allocations
haven t changed much. Instead of regularly rebalancing even
small amounts, let the growth of your investments be your
guide, suggests Ben Welch, director of advisor business devel-
opment at TD Ameritrade Institutional.
Welch s firm has software that allow its advisers to monitor
portfolios by their asset allocation, but individual investors
can watch the same numbers.
Set a band of 5 per cent or 10 per cent, and when one part
of your portfolio outgrows its intended allocation by that
much, start to think about rebalancing. For example, think
"rebalance" once a 60 per cent stock portfolio turns into a
66 per cent stock portfolio. Will you miss the top of the market
with part of your investments? Yes, but you ll take solid
earnings off the table.
If you have to rebalance via a brokerage account that has
high transaction fees, rebalance less often. That was the con-
clusion of a paper published recently in the Journal of Portfolio
Bank of America s Merrill Lynch researcher Himanshu
Almadi and others said investors facing low costs would do
better rebalancing quarterly, those facing higher costs should
rebalance once a year.
Plan for tax consequences
It s better to hold taxable securities for at least a full year
so they can qualify for lower long-term capital gains tax rates.
You can cut your taxes further by selling your losing invest-
ments while you re selling your winners, to lock in those losses.
You can rebuy the same losing investment in 31 days, or simply
buy a similar but different one immediately to complete the
Brian Burmeister, a Denver financial adviser with Charles
Schwab s private client group, tells his clients to sell losers
before they hit the long-term one-year mark.
That way, at tax time they can offset short-term gains and
ordinary income, both of which are taxed at higher rates than
Think outside broad categories
Don t just think of stocks and bonds. Rebalance a global
portfolio when one region runs away from the others. Rebalance
a mixed stock portfolio when growth stocks get away from
Do this steadily enough and you might turn into one of
those rare finds: an individual investor who buys low and sells
How to force yourself
to buy low and sell high
News that the US economy grew at a brisk
annualised rate of 4.0 per cent in the second
quarter was greeted with relief. After a puz-
zling first-quarter contraction, growth has
returned, though the recovery remains the
weakest since World War II. As of June, the
expansion is now five years old, longer than
the post-war average of 58 months.
The next recession could in theory be
around the corner. But unlike people, busi-
ness expansions don t die of old age: They
are killed by an unpredictable shock, said
Bob Hall, an economist at Stanford University
and chairman of the academic panel that
dates American business cycles: "The next
recession will come out of the blue, just like
all of its predecessors."
Recessions have become rarer in recent
decades. The three expansions preceding
the 2008 crisis lasted on average for 95
months. For that, economists credit struc-
tural factors such as companies better con-
trol of stocks, and modest inflation. The
latter is especially important because as the
late Rudi Dornbusch, an economist, once
said, postwar expansions didn t die in their
beds; they were murdered by the Federal
Reserve. The economy would run out of
spare capacity, profits deteriorated, prices
and wages rose and the Fed hiked interest
rates, precipitating a recession.
If that pattern holds, the current expansion
should have plenty of life left in it. Inflation
is actually lower than the Fed s target of 2.0
per cent. The huge hit sustained during the
crisis has a positive side: It has given the
economy plenty of running room. JPMorgan
reckons that adding a percentage point to
the output gap at the start of an expansion
adds two quarters to its life span. (The output
gap is the difference between actual output
and the maximum an economy can produce
without sparking inflation.)
This suggests the current expansion has
at least two more years to run; the economy
is still operating some 5.0 per cent below
Better yet, the previous three expansions
have ended around three years after unem-
ployment fell to its "natural" rate, likely
between 5.0 per cent and 5.5 per cent. By
that yardstick, JPMorgan reckons the expan-
sion could last until 2018, which would make
it one of the longest on record.
But that may understate the actual risk
of recession, for two reasons. One is that
the output gap may be smaller than thought.
Lewis Alexander of Nomura Securities, a
bank, says labor markets are behaving as if
the gap has almost disappeared.
In June, the proportion of jobs that went
unfilled jumped to 3.3 per cent, matching
the high of the previous expansion.
Second, interest rates have been stuck at
zero since the recovery began because of
sluggish growth and low inflation. Even if
the Fed starts to tighten next year, as expect-
ed, rates will spend most of this expansion
closer to zero than at any time since the
1930s. That leaves the Fed precious little
firepower to respond to another shock.
Thus, previous cycles may be a poor guide
to how long the current one lasts. Olivier
Blanchard of the International Monetary
Fund thinks the economy now fluctuates
between "normal" periods when it behaves
as it has during past cycles, and "abnormal"
periods when it meets the constraint of zero
interest rates and weakens suddenly.
"Before the crisis, we assumed we would
stay away from those" constraints, he said.
"Now we know that, once in a while, we
shall get into that region and we have to be
ready for it." AP
US economy: How long will the expansion last?
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