Rebalance Challenge

I was looking forward to leveling out my mountains and valleys among investments, but something odd has happened...I don't have enough cash to rebalance! It seems that in this extreme economy, the bulk of my exchangeable cash is in bonds, and the bond funds have taken a hit as well. Also, the bulk of MountainMom's cash is in a large annuity.

So here's what I am trying to do. I will be making as many exchanges as possible without totally depleting my cash assets. This means I will be buying as many stocks as possible, mostly in the S&P 500 fund. To do this properly I will be selling a small percentage of bonds. Also, it's time to put some more money into our IRA's, some of which will go to buying these cheap stocks, and some will go to build up new "cash" reserves, probably in some kind of money market fund. And the only reason I'm putting any money into cash now is to have something to buy with at the rebalancing next quarter.

All of these moves take a leap of faith. But buying low and selling high is what works, and it has never let me down. Fortunately, MountainMom and I are able to invest another $6,000 each in our IRA's, and this is a great source for buying stocks. Yes, it is unnerving to watch those stocks drop the next day, but they will trade within that same low range for weeks to come. You need to be in the market when the recovery starts, and the worst thing to have happen is to see stock prices rise, and think it's too late to get back into stocks. You miss the initial jump, and then those that follow.

This is unnerving enough to make me think I should start rebalancing no more than once a year.

Forgive Me for I Have Sinned

Over the past 2 months, I noticed all the low stock prices and went ahead and bought a few shares in a couple of mutual funds. A little voice inside me said, "there's no way these stock can go any lower!" And the next day they indeed did go lower. What was I thinking?

Yes, I was completely ignoring my own directive to only buy when it's time to readjust the Mountain Method. Lord help me, I now see that I was Market Timing. But at the time the siren call was sooooo loud. "Buy." "Buy," they said. Fortunately, an even louder voice eventually yelled at me, "follow your own advice, dummy!"

Fortunately, it was only a very tiny percentage of our portfolio that was traded and I was reminded of my folly a few weeks later when the mutual fund mailed a confirmation of my big $1,000 transfers from the Bond fund to the S&P 500 Fund. And boy was Mountain Mom irritated that I generated that unnecessary paperwork that will eventually end up in a landfill.

I needed to slap myself a few times to get back on the path of righteousness, and I did it by reminding myself that my next rebalance day is but a few weeks away. It is at that time I will be trading fairly large amounts of money with the full confidence that it matters not what the market does the next day. It will be all good just a little farther down the road.

Don't you go listening to the call of cheap stocks. Stop watching CNBC and watch the Weather Channel instead.

Exceptions to the Rebalance Rules?

The Mountain Investor site is a cooperative effort among several friends, but we have been rather UN-cooperative about one aspect. We disagreed about recommending off-track rebalancing with the Mountain Method if the market dropped 20% or more. If we have done that when the market hit the -20% mark, we would be feeling let down right now with the market down closer to 30%. So, for now, the 20% idea remains on hold.

It is a demonstration how veering away from our diciplined method of rebalancing only on a set schedule has its perils. I have chosen to rebalance every quarter and at the next rebalance day I will be excited to see how many changes need to be made to maintain my chosen balance.

You haven't sold anything yet, have you?

Starting at the Top

We started the Mountain Investor web site during high times in the stock market. The basics of the Mountain Method have not changed now that prices have dropped. The next few months should provide an extraordinary buying opportunity, and a chance to Average Down some of your positions.

Just remember to stay the course. Wait for your chosen time to make changes. I know it's hard, but your Dad is here to help you grit your teeth and overcome your fears. At least for now.

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Instead of posting replies on my web site, I'll open up my unconventional financial ideas to your comments. Don't be afraid of your Dad.