“Rebalancing” is said by some to be a wonderful portfolio practice, as it restores a predetermined ratio of stocks to bonds. But this consensus wisdom has a cost that is seldom mentioned.

Over very long periods, some kinds of assets have outperformed others. So on the whole, rebalancing over extended periods has tended to remove funds from potential higher-return sectors and placed them in lower-return sectors.

The aim of rebalancing is to reduce volatility. It is generally successful at that. But bottom line, rebalancing may deliver lower volatility to long-term investors at the cost of lower returns.

The only problem with volatility is that people may react to it and behave less than optimally—selling out at a low point, for example. But rebalancing is not the only way to deal with this issue.

Behavior can be changed by reframing. Long-term investors can be persuaded to consider the original starting point (the contributed capital) as the anchor for comparison to current values. Gains in the faster growing side of the portfolio can then be viewed as “house money,” so to speak. After some gains are amassed, then volatility does not need to be viewed as a loss of capital. Selling out at low points may be less likely.

Problems arise when investors define a “loss” as the peak value ever attained less whatever lower value may occur later. By that logic, people could claim that they have lost money most of the time, even while they’ve grown a fortune. It makes no sense to us. Most of the time, markets and stocks are trading lower than some prior peak—they never set a new high every day.

By reframing gains and losses to the cumulative result since inception—instead of over some shorter period—one might substitute reframing for rebalancing and could end up with more wealth. No guarantees, of course.

Clients, this is one of the reasons we talk about long time horizons, patience, and living with volatility. If you would like to talk about these things or any others, please email us or call.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

All investing involves risk including loss of principal. No strategy assures success or protects against loss.

Rebalancing a portfolio may cause investors to incur tax liabilities and/or transaction costs and does not assure a profit or protect against a loss.

Here at 228 Main Street, we pride ourselves on having an elite clientele. Other advisors may brag about having richer or more famous clients. We prefer to enjoy having the wisest group of clients we could ask for.

Some financial types might see this as a drawback. If you are trying to trick someone into a sale, you want them as gullible as they come. But we are in this business for the long haul. If we resorted to tricking people, how long would they stick around? Even if we managed to string them along, they would only hang around until the next slick pitch.

We would rather find people who understand what we are about. It is simpler. The added benefit? It is easier to face ourselves in the mirror.

We are not in the business of selling to suckers. Radical transparency about who we are and what we do is the best way to make sure we are all on the same page. We do not believe in using manipulative sales tactics.

We do not sugarcoat our risks. Our investment philosophy carries risks. If you want safety and stability, you can open up a savings account at the bank. That is not what we are here for, and we will not pretend otherwise.

We do not promise returns. We have winning streaks and losing streaks. We hope to make the winning streaks outweigh the losing streaks. We are proud of the work we have done, but we make no guarantees.

We do not pretend to be a charity. We are not in business as a favor to you. When we buy groceries from our friend the grocer, he is providing us a service; when we do our work for you, we strive to do the same. But he does not do it out of the goodness of his heart, and neither do we.

Some of the pitches we have heard are so transparently phony it would be insulting to your intelligence if we were to use them on you.

We believe you are a member of a very select group. Clients, if you would like to discuss any aspect of your business, please call or email us.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

All investing involves risk including loss of principal. No strategy assures success or protects against loss.

As Halloween approaches every year, haunted houses sprout across the land. Their purpose is to surprise and scare you, to provoke fear and screams and chills. Sights and sounds and sensations are all used to create the illusion of horror and danger. People pay money for the experience.

We were reminded of this recently, listening to promotors of a canned sales pitch that began, “With all the uncertainty in the market…” The peddler’s aim was to create a sense of fear and danger about long term investing. The pitch seems cynical, since it is alleged to be appropriate in all market conditions.

People who succumb to scare tactics pay for the experience, too. The costs may be in foregone gains resulting from stagnant investments, or higher expenses from products that purport to provide stability.

A member of the best group of clients in the world (our opinion) told us recently about her response when another financial type promoted the fear of market uncertainty to her. “What market uncertainty? There is certainty in the market. It is certain to go up and down.”

Accepting volatility as an integral part of long term investing has been quite liberating for this person. She has been through market cycles, up years and down years, and she knows how it works. She lives a vibrant life in retirement, filled with sports, activities, friends, and travel. Worrying about things that cannot be changed does not fit in to her life.

One of the keys to her comfort is understanding that account balances are not what buys the groceries–cash flow does. Knowing where the cash is coming from allows her to live with the ups and downs of her account value. She keeps track of where she started, so she understands the magnitude of her cumulative gains over the years.

We are not saying that our approach, our philosophy, is right for everyone. If you prefer to believe the markets are scary, you may—it’s a free country. We are talking to our clients here, not debating those who disagree.

Clients, if you would like to talk about this or anything else, please email us or call.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

All investing involves risk including loss of principal. No strategy assures success or protects against loss.