One word you sometimes hear people use is “contrarian” investing. There’s something very appealing about it, the allure of insider information and being right when others are wrong.
It’s also a lonely and difficult way to invest. Sure, you can look at market history and see the exact moment when Apple was a buy or a sell, or when gold was a good deal and even that moment when the indexes bottomed at last.
Hindsight is 20/20, and the past is literally uninvestable. Until we have time machines, either you are a true contrarian or you are not.
A true contrarian investing strategy is exactly what it sounds like: Look at what the mass of investors are doing and do the opposite. If the market is breaking records, sell it short. If a stock is falling like a rock, buy it up.
Whatever happens, stick to your guns. Even if the world crashes, that’s your greenlight to buy more. Easy to say, very hard to do.
But contrarian investing can be simple. In fact, a truly well-managed portfolio is always doing the opposite of what the crowd is doing.
The difference is incremental steps. The first part of the process is to create a portfolio with a variety of investments. The easiest and lowest cost way to achieve this is with index funds, and there are index funds for nearly everything these days.
A portfolio will contain some very different investments. It’s likely to have a fair amount of large-cap U.S. stock, but also bonds, real estate, foreign stocks and bonds and other asset classes.
Here’s the thing: Rebalancing your portfolio, ultimately, is a contrarian investing move. Your portfolio will become unbalanced. Stocks will move in one direction, bonds another. Real estate will get hot and cool off.
Investors will love foreign stocks until they hate them. Then they’ll sell them like there’s no tomorrow.
Portfolio rebalancing will lead you to buy assets that are out of favor. Incoming dividends and interest will need to be allocated somewhere, right? If one asset class or another exceeds your predetermined limits, you will sell off those gains and distribute them to the “losers” in your portfolio.
You will be a contrarian investor, but one that takes small measured steps and avoids the damage of emotional trading. It’s a win-win that really works.