The magic of proper asset allocation and re-balancing. Is it time?

Albert Einstein called compound interest the eighth wonder of the world. It would be a greater wonder if it is combined with proper asset allocation and rebalancing, .

Proper asset allocation?

A 50/50 portfolio is a good example. Fifty percent of it would be made up of the US stock market as represented by the S&P 500 and 50% would be in money or near-money. A 60/40 or 40/60 portfolio would get different results but only marginally so. No individual stock picking!

And rebalancing? Anytime investors’ asset allocation changes by market movement, they should re-establish the balance. Taking profits when the market goes up or buying bargains when the market drops by 5% or so works well.

For example, after the  1929 crash, it took the market 14 years to break even. During that period, the worst and market history, a MarketWatch article shows that a 50/50 portfolio was positive 95% of the time after any five-year period. During any 10-years, the 50/50 portfolio had positive returns 100% of the time.

Those results do not account for transaction costs and taxation. Further, they assume that no active trading takes place.

And how does wall Street feel about no active trading? Here we have another example of the conflict of interest between Wall Street and Main Street. On balance, active traders are losers. Wall Street win every time.

Previously, we published a post about active trading. The post reviewed the results of some 20,000 Brazilian day-traders over two years. Ninety-seven percent lost money. Only 1.1% earned more than the Brazilian minimum wage. The brokers loved it, of course.

Will that be any different in the coming years? What should we do now?