Wealthview Capital adheres to the major tenants of Modern Portfolio Theory (MPT) in managing our client’s assets. Those three tenants are (1) broad diversification, (2) optimal asset allocation and (3) periodic rebalancing. Given the market’s recent sell-off we made the decision to re-balance accounts this week.
Rebalancing means periodically taking money out of assets that have out-performed (bonds in this case) and redeploying those dollars into under-performing assets (currently stocks). It is a contrarian form of investing that realigns your portfolio back to your asset allocation policy (the blend between stocks, bonds and cash). That policy is what will determine your long-term returns (assuming proper diversification) and your short-term volatility.
Many investors, left to their own devices, will either do nothing during extreme market volatility or do the wrong thing. Doing nothing during a sell-off means riding the market down and then riding it back up again, only later lamenting the lost opportunity to buy at lower prices. Another action is to panic and sell during times like these which history has proven to be a mistake. I can’t count the number of times over my career I have heard someone say, “But this time is different.” It’s always something but it is never different.
Some may question the wisdom of buying into the market now when it is so volatile and that is a valid concern. However, no one knows which direction the markets will take over the short-term and that is why virtually every market timing strategy ever introduced has failed. We are going to take bites at this apple until it turns the corner and look forward to the day when we will rebalance in the opposite direction, moving money out of stocks and into bonds for the same reasons.
If you believe, as we do, that the best way to grow wealth over time, net of taxes and inflation, is through participating in this great free-market experiment called capitalism, then that means owning those companies that produce the goods and services demanded by an ever expanding population. It doesn’t mean selling them in a panic. The current situation will pass, just as every crisis in history has faded into a distant memory. Being a successful investor requires a long-term focus and a certain emotional detachment from the market’s day to day gyrations. The current environment also demonstrates again the importance of periodically reviewing which asset allocation will increase the probability of you reaching your goals with the least amount of risk. That’s a discussion we always welcome.
Thanks as always for your business, trust and confidence.