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The Horoscope of Investing - Scott Adams' Blog

The Horoscope of Investing

I assume that most readers of this blog don’t believe in astrology, since there is no scientific evidence whatsoever to support it. But do you believe investors should rebalance their investment portfolios every year?

Suppose you start out with a balance of 70% stocks (in broad market ETFs) and 30% bonds, which for some reason you think is right for you, and your stocks have a good year. Now you’re at 80% stocks and 20% bonds. Should you rebalance?

I think we can all agree that if something happens to change your overall financial circumstance, such as nearing retirement or winning the lottery, you might need to rebalance your portfolio. But what if the only thing that happened was that you aged from 35 to 36 and your stocks had an unusually good year? Do you rebalance then?

I think most financial experts would tell you there is a magical number that each investor should try to maintain in terms of portfolio balance. Your first indication that something is fishy is that experts will come up with different magical numbers. Your second sign of trouble is that the experts have a naked self-interest in getting you to rebalance more than you might need to because your irrational belief in rebalancing is 90% of the reason you think you need a financial expert in the first place.

If you have a link to scientific evidence that annual rebalancing makes sense, and it isn’t written by someone who has a financial self-interest, please include it in your comment.

On a semi-related note, do you believe yesterday’s stock market plunge was a “mistake” as some say, or was it a case of manipulation by someone who made a fortune on it? Ten years ago I would have said it was a mistake. Today that sounds na├»ve.