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Avoid the next bursting investment bubble

Avoiding bubbles
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Avoiding bubbles

Maintaining a diversified portfolio and investing in accordance with a well-thought-out plan will mitigate the damage from a bubble in one asset class. Though nothing is guaranteed, a broad asset allocation strategy across asset classes and geography coupled with regular rebalancing can reduce the risks individual investors face.

"In the absence of cost you should rebalance daily. If you determine the right allocation for you is 60 percent equities and 40 percent bonds, why let the market determine what your allocation is?" says Larry Swedroe, director of research at Buckingham Asset Management in St. Louis.

Unfortunately, cost is never absent when trading, in which case Swedroe recommends rebalancing every time new cash is deposited into the account rather than doing it on a quarterly or yearly schedule.

"Time-based rebalancing makes no sense. An alternative is setting up boundaries. For instance, you may have 10 asset classes, each 6 percent. 'As long as it stays between 5 (percent) and 7 percent I'll let it drift. If it gets out of there I'll act.' You determine what is appropriate, but stay disciplined and stick to it," he says.

Investors could even benefit from bubbles by regularly taking profits off the table and reinvesting in asset classes that aren't doing so well, effectively succeeding at investing by buying low and selling high.


 

 

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