Many tired thoughts come to mind as I review the volume of financial planning advice that is making its way into publications and programs these days. This ‘advice’ is coming out just like clock work” is one such cliché. Now that the horse has left the barn, let’s close the gate is another.

I received a publication today whose major theme was portfolio rebalancing – I added the word blind – I’ll get to this latter idea in a minute.

If the people that come to our office are any indicator (and they are), clients (and their advisors) who have used asset allocation over the last ten years, didn’t do any portfolio rebalancing when it would have been of some benefit back in 2007. One reason they didn’t, was because these folks were so far behind the curve based on the underperformance of asset allocation during the 1990’s. As a result they had to make up the opportunity that had been lost and so they stayed on too long.

Furthermore, many of these same folks sold at the bottom between November of 2008 and March of 2009 and have not yet reinvested. Therefore, they have no profits at this point in time to “rebalance”.

So once again the financial planning population at large recommends “closing the gate after the horse has left the pen”, as they do in each market cycle – “just like clockwork”. I observed it in the November to March timeframe when brokerages were advertising certificates of deposit as their primary offering. The time to buy CD’s for people who wanted out of the market was in 2007 – before the fact, not in 2009 after the fact.

Even though the planning profession is fixed on what has already taken place, when you stop and think about it, you realize that investment results are about what is going to happen in the future, and not the past. Blind portfolio rebalancing pays absolutely zero attention to assessing what will happen in the future. It simply instructs that if you have profits in one fund, you take some of those profits and redistribute to laggards, with no assessment of why things are lagging.

Based on this logic, investors should take profits in their Amazon or Google stock and buy Gannett (the newspaper publisher). Amazon is in it’s infancy as a company and Gannett is trying to determine how it’s going to stay in business another three years. Multibillion dollar losses have taken place in newspaper publishing on deals like the Chicago Tribune. Circulation at major newspapers nationwide has dropped precipitously over the last three years. Blind portfolio rebalancing considers none of this.

It’s also true that planners who recommend this blind portfolio rebalancing don’t own individual stocks like the ones mentioned above – they recommend mutual funds. This sounds like a better idea on the surface, but it’s not. Because mutual fund investors, particularly those in mutual funds with high portfolio turnover, have no earthly idea what they actually own through the fund. Therefore they have even less information to rely on in making reallocation decisions. We call that situation “the blind leading the blind”.

In order to be successful investing and managing your portfolio, you must have a system, a set of disciplines that allows you to accurately assess the state of each of your investments and what is reasonable performance going forward. No one is perfect in this – not even Warren Buffett. But the simple reality is that your investment performance is so far superior when you are approximately right instead of absolutely wrong.

Does your portfolio need a dose of common sense and the results that it produces? I’m here – email me dana@thebarfieldgroup.com.

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