The Only Free Lunch In Investing

Posted on May 14, 2015 at 12:15 PM PDT by

You’ve probably heard or read about all kinds of strategies that will make you rich investing. They go by many names, but they all follow the same basic idea: Zigging when others zag.

It might be buying sectors at certain points of the business cycle. Or stocks that have been bid down to unusual lows. Or only owning stocks ahead of elections, when Congress is out of session or the moon is full.

Yet any kind of market timing or stock selection strategy depends on the same basic mechanism to work out. You have to know something that others don’t.

free lunch in investing

If you’re talking about a tiny microcap, it’s possible you know something absolutely nobody knows. Not likely. Just possible.

It’s also possible that anyone in the world with deep enough pockets will bet against your position for any reason or no reason, wiping out your investment in seconds.

If you’re looking at a large, publicly traded company, you might have an inkling that management will move one way or another on an opportunity. But the chances you’re the only one taking that bet are few. And plenty of deep pockets could invest against you.

Or you could take advantage of the only free lunch in investing — rebalancing.

Rebalancing does not depend on factors beyond your control. It simply recognizes reality and reacts accordingly. Your decision to buy or sell an investment rests solely on the fact that it has risen to a value and now represents a larger portion of your total portfolio than intended (so you sell some of it).

Or that it has fallen and is now a smaller portion of your portfolio than intended (so you buy).

Here’s the neat thing: You can buy using incoming cash from contributions, of course, but also incoming dividends and interest. If you sell and generate cash, that money has a home elsewhere in your portfolio, even if nothing has gone down.

Get your free lunch

Since something went up (what you sold), that means something else is relatively less in your total portfolio. That’s what you buy with the cash.

Do this over and over and you can’t help but sell high and buy low, efficiently and at a low cost. That’s how your portfolio grows steadily and compounds into a powerful, effective retirement plan.

You aren’t tempted by stories of winner stocks that end up being dogs. You aren’t worried when some part of the market falls. To you, it’s an opportunity. In fact, the only “danger” left is cost.

Cost is the killer, and you can manage that by using inexpensive index-style ETFs. The only free lunch in investing can be had without a lot of tricky trades, costly advisors and complex research.

All it takes is zigging when they zag, the right way.