Have you ever heard that the secret to success in the stock market is to “buy low and sell high?” Unfortunately, many studies point out that individual investors are fairly bad at timing the stock market. These studies suggest that most people tend to invest after a long and sustained bull market, and then they sell after the market has crashed. Essentially buying high and selling low.

What if a way existed to strategically buy low and sell high? Would you want to know about it? And when would you plan to implement it?

One of the ways I believe you can intelligently invest in the stock market is to create a broadly diversified portfolio across asset classes and sectors diversified across the entire globe. This method of diversification is what I call strategic asset allocation and is built by using low-cost index mutual funds or exchange traded funds (ETFs). The secret ingredient that really makes strategic asset allocation work is re-balancing the portfolio. Re-balancing is counter-intuitive because it forces you to sell some of your winners and buy more of your losers. But if you believe that the market is efficient, then you believe that no one asset class or sector will ever dominate from year-to-year and that eventually a reversal in the mean will happen. So while large cap growth may be the best asset class this year, perhaps small cap value will be the best next year, and treasury inflation protected securities the next. 

Re-balancing is an intelligent way to sell high and buy low. How often should you re-balance your portfolio can and should be debated. Some people will re-balance a portfolio based on calendar year of historical data. An old saying says, “Sell in May and go away.” But instead of selling some will use this historical data to re-balance their portfolio in May instead. Depending on whether you have your money invested in a qualified or non-qualified account may impact how often you want to re-balance your portfolio just from a tax planning standpoint.

We set the drift parameters for our strategic portfolios at anywhere from 2% to 3%. So in anytime any one asset class has drifted out of alignment by more than 2% or 3% that is an indicator to us to re-balance a portfolio.

In summary, one way to make money in the stock market is to buy low and sell high. Re-balancing a portfolio that is broadly diversified across asset classes and sectors across the entire globe is a strategic non-emotional way of helping you do just that.