If you read the financial press on any given day, you will find that most of the “news” revolves around specific investments.
Is it time to buy China? Time to sell technology? Will that blue-chip stock beat estimates? Are commodities going up — or down?
What drives all of this coverage is not any kind of knowledge regarding the answers to such questions. Really, what drives things is reader interest in the topic.
If financial news purveyors sense that a lot of people have bought into a given investment theme, they order up more coverage of that investment. It’s supply and demand.
All people want to know, in the end, is if it’s time to sell an investment or, conversely, time to buy. They want certainty in an uncertain world.
They need to know this because they have to sell an investment in order to realize a profit. Beyond that, they want to avoid being the last to sell and perhaps getting stuck as the face value of the investment declines precipitously.
A rapid decline, of course, feeds the other side of the equation. If it’s past time to sell an investment, it is time yet to buy? And so the cycle begins anew.
Investments thus go up and down in value in a broadly predictable way. Once people have sold off enough of a certain company or investment type, the buyers rush in and push it back up.
Somewhere in the middle is what’s called “fair value” by the experts. It’s a faintly ridiculous idea, fair value. Was it unfair when the investment went down 40% in a month? What is unfair when someone sold it after doubling their money?
No, it was simple the value at that moment. Somewhere in between there is an equilibrium, a price that half the market thinks is too high and half the market thinks is too low.
You could try to figure it out with various market-measuring equations, such as P/E ratio or book value. And you’d be close to right sometimes and horribly wrong other times.
Or you could rebalance and avoid all the hassle. Rebalancing ignores market statistical guesswork. It avoids trading and attempting to out-hustle the crowd.
It doesn’t take rocket scientists or PhDs to rebalance. It take a few days out of the year to do. The rest of the time you can safely ignore the news, such as it is.
Rebalancing is nothing more than deciding how much of an investment type you want to own in a portfolio — say, 60% stocks and 40% bonds — and sticking to it.
When the market chases stocks higher, you periodically sell off the excess. The cash is used to buy bonds. It doesn’t matter if bonds are “cheap” or “expensive.” All you are doing is rebalancing by selling high to buy low.
When bonds move higher and stock lag, you reverse the procedure. Did you catch that last part? Again you are selling high…to buy low.
That’s the only way to really make money in the investment world. The best time to sell an investment is when you have too much of it. Anything else is market timing, a sure ticket to long-term losses.