Chapter 84: Are Asset Allocation and Rebalancing Correct?

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[The Origin and Today of James] Chapter 84 - [Asset Allocation and Rebalancing Correct? 】(11/23/2023)

Thank you for your guidance. I was thinking that the annual stock-bond rebalancing in books and so-called financial internet celebrities is also a timing operation. The problem is that the short-term market cannot be accurately predicted! What's more, the liabilities of the United States and the borrowings of American companies are not used to develop the economy, so why not invest in American companies that are struggling for the economy? It is also wrong to invest in other countries. Many companies in leading emerging countries are no longer making money? Will it continue to grow in the long term? Will the dot-com bubble of 2000 happen again in the future? The problem is that if the layout is long-term, and then when there is a sharp correction of 20%, you start to buy in batches regularly, plus you have savings and annuities on weekdays. Even if it takes eight years to return to the starting point, this strategy will be solved in about 4 to 5 years. Real estate can be held for decades, why can't you wait for 5 years? This is how I see it, the so-called stock-bond balance fantasy!

James replied:

You are right!

If the returns of those who invest in bonds are higher than those of those who engage in industry, then no one will engage in industry.

If the return on industry is higher than investing in bonds and lending money to people who are engaged in industry, then of course we investors will invest in industry with high returns (index funds) and will not want to invest in bonds for any minute (many people invest in bonds because of the rise and fall of central bank interest rates. This is speculative behavior. Real investment is long-term, and your investment strategy will not change because of short-term interest rate changes).

The stock-bond balance does not necessarily have to be timed. It can be a passive balance, which means doing it once a year at the end of the year, or rebalancing after the ratio of the two assets differs by more than a certain percentage. This is a passive balancing method. Passivity is always better than active. Of course, we are not encouraging or agreeing to invest in bonds. We are just talking about whether to be active or passive when rebalancing. If you do active balancing based on artificial feelings that stocks will fall or the central bank will raise or lower interest rates, that is timing operations.

Buffett said that diversified investors do not understand investing at all, so they diversify. Although we do not concentrate on individual stocks, because we do not understand individual stocks, for index funds, the differences between countries are very obvious, so we focus on investing in the United States. This is the right way, and we should not diversify to other areas with low returns.

If most people invest without thinking at all, they just buy when they have money. If you understand cycles, you can carefully read Howard Marx's book "The Most Important Thing in Investment" and you can make the best arrangements for your funds in the extreme conditions of the market cycle. However, not everyone can understand cycles. Such active investment is completely based on the extreme fear and greed of the market. Investors must understand the mistakes of the masses and recognize the mistakes of the masses in order to prove that their contrarian investment is correct. It’s not easy to do this! Most people still can't do it. Only top professionals like Buffett and Howard Marx can do it.

Investors don’t want to get rich slowly because the stock market is too easy to operate. Real estate can be held for more than ten years because it is a very difficult asset to operate.

Investing in bonds is an investment asset with a lower return than investing in index funds in the long term. For an investor who values ​​absolute returns, it is meaningless and incomprehensible to diversify the balance of stocks and bonds.

Most people think that the balance between stocks and bonds can reduce asset volatility. They accept low returns as a way to reduce risks (they regard volatility as risk), but they misunderstand risks. Volatility is not a risk, but long-term low returns are risks. Just like Buffett said, if I know the best way to achieve long-term investment performance, then the fluctuations in the process are not risks at all to me, and fluctuations are meaningless to a long-term investor.