The financial planners who peddle wrapped portfolio products of mutual funds tout re-balancing. I'm not into re-balancing. Rather, I go along with Stephen Jarislowsky in The Investment Zoo…top of page 104. I memorized it.*
“If you have premium high compound growth non-cyclicals, it is not really necessary to get out if the stock price goes too high. If far too high, obviously you can trim a bit and pay some tax, but be sure that your gains have been real, not inflationary mirages. Personally, I normally just hold and take a few down drafts, counting on the next bull market to take me up again.” p 104
Read the rest of the Zoo's page 104 also. There's more. What wisdom, eh. Among other things, Mr Jarislowsky tells you what stocks to own (and not own)…here and on other pages. Page 94, for instance, not BCE. Don't own cyclicals. I'm still being faithful even though 2008 was more than a 'down draft'. Two zero zero eight was 'the' test of the strategy.
His expression “If far too high” reminds me of Nortel in the summer of 2000. I have my three sales slips framed ($81.50 on May 25; $115.70 on July 26; $120.75 on August 24). It also make me think of the market as a whole in 2007…far too high.
Should we have sold in 2007 and gone to cash? But just as importantly, if we had sold and gone to cash sometime in 2007, would we have stayed in cash until the terrific prices for our stocks are the end of November 2008? I bought too early. You? It's very, very hard to stay in cash. And sometimes you have to stay in cash for years.
Anyway, I do not re-balance. I could make two mistakes, if I did. I could sell a stock that went higher after I sold it, and I could buy I stock that went lower after I bought it. And, I would have to pay tax on the gain. That's fine, but the tax money is gone forever “leaving you with up to 25% less money than what you were getting from dividends before the sale” (Again Jarislowsky page 104 of the Zoo). You could figure out how much the stock has to drop for you to buy back the same quanity and still be ahead. Mr Jarislowsky concludes page 104, and Chapter 8 by saying: “With a good stock in a taxable account, it is much easier just to stick with it.” Notice the word 'good'. I held my good stocks through 2008. The reward: dividends increased.
I decide only between cash and dividend-paying stocks, and in stocks between financial and non-financial common stock. I do not own bonds, preferreds or income trusts.
Who is to say the the allocation you decide on, say 60/40 is correct anyway (no 's'). And when do you switch. All this asset allocation is fine in theory, but when to sell. Honestly now, did you think of selling in 2007? If so, and you did, could you have stayed in cash or would you have bought too early.
I'm happy with the few premium dividend growers I own. If I thought dividend growth might fall percipitiously, I could sell. Benign neglect is what I practice after the portfolio is set up.
I hold for the growing income. Written December 1st 2008. Revised a bit February 5 2009
* As part of one course I took in Economics in the late 1950s, the professor made us memorize the preamble to the Bank of Canada Act. Memorizing the top few lines of page 104 in Jarislowsky's The Investment Zoo is much more useful. If you still do not own this book and are trying to invest on your own, you are %&@!*(.