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Carolus Rex
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Sweden
Jan 1970
time: 06:26
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Sells for 4.98 SEK already... Ca-shing!
Carolus
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JohnT
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Capitalist
Mar 1999
time: 00:26
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I just had a thought while posting in the Foundation thread. As I mentioned before, the movements of the stock market as a whole are based more on psychology than on rational analysis of the numbers. This is because most stock market booms and busts are formed when millions of inexperienced stock owners are hyped into a frenzy about their acquisitions (the 20's, the late-50s/early-60s and the "Nifty Fifty", the 18 year period from 1982-2000), only to be scared off by the millions during the eventual bust to follow.
Which is precisely the opposite of what we all believe we do. We think we sell high and buy low... but we don't, because we hate to depart with a winner almost as much as we hate to associate ourselves with a loser. Right now, it's not cool to buy K-mart, or Enron, or Lucent, or Ericksson, or any one of the myriad bottom feeders of todays market.
It's classic - all of a sudden everybody thinks they're a professional. A few people trade tulips in Amsterdam and then, all of a sudden, half of Europe thinks that they are tulip experts. 
In short:
How to tell when a market is overvalued: When millions of inexperienced investors are bragging about thier retirement accounts.
How to tell when it is undervalued, or at least, fairly valued: When everybody tells you to stay away.
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JohnT
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Capitalist
Mar 1999
time: 00:26
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"You have to have correct timing."
No, you don't. Not for my plan, at least.
The key is rebalancing. The point of rebalancing is to make sure your portfolio maintains the same balance of assets throughout the life of the portfolio. Over time the percentages you assign to various asset classes will change (as you grow older, financially you grow more risk averse), but the concept will remain the same.
If you look at my plan, you will note that I have percentages (relative to the portfolio as a whole) which tells me how I want my money invested. For example, I have 60% of the portfolio in stocks, and 40% in bonds. Over the next year, lets say stock funds gain by 5% over bond funds so that now my portfolio is unbalanced to 65% to 35%.
To rebalance my portfolio, I would have to sell the 5% gain in stocks and reinvest that money into bonds to re-achieve the 60/40 balance that I want in the first place.
Note that rebalancing makes me buy low and sell high. It doesn't allow me to foolishly hang onto stocks/funds that have over-appreciated, nor do I avoid purchasing in the market when it is down.
A portfolio that was 60/40 at the beginning of 1982 would've been 79/21 in 2000 if it had not been rebalanced in all that time. Almost 80% of your retirement money tied up into stocks at the height of a bull frenzy... tsk, tsk, tsk.
Otoh, had you been rebalancing you would've continually been cashing in on stock appreciations (for almost 18 years!), while continually buying into a bond market that is likely poised to be the financial leader in the upcoming years. You would've been only invested in 60% stocks when the bottom fell out, and, after the fall, you would've then put yourself into a major stock buying frenzy precisely at a time when everybody else is selling for pennies what you had been selling them for dollars.
Last edited by JohnT on 17-03-2003 at 02:44
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12-03-2003 19:08
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