{"id":860,"date":"2014-10-01T09:15:34","date_gmt":"2014-10-01T09:15:34","guid":{"rendered":"http:\/\/www.thebizsense.com\/views\/?p=860"},"modified":"2014-10-18T07:18:57","modified_gmt":"2014-10-18T07:18:57","slug":"planning-your-portfolio","status":"publish","type":"post","link":"https:\/\/www.thebizsense.com\/views\/business\/planning-your-portfolio","title":{"rendered":"Planning Your Portfolio"},"content":{"rendered":"

\"planning<\/a><\/p>\n

Planning Your Portfolio – All successful investors use heuristics to shape their strategic decisions, but it\u2019s wrong to assume they are always correct.<\/p>\n

Wikipedia defines heuristics as \u201cexperienced-based techniques for problem solving.\u201d However, it rightly warns that the solution they provide \u201cis not guaranteed to be optimal,\u201d merely \u201cgood enough for a given set of goals.\u201d<\/p>\n

In a new book,* William Bernstein examines some investment heuristics and exposes their flaws:<\/p>\n

Buy low and sell high<\/h3>\n

Trouble is, even the most experienced investors find it psychologically difficult to buy when prices have plunged (Wall Street fell 90 per cent from 1929 to 1932), and especially if they\u2019re continuing to fall. If you plan to buy after the market has bottomed, how do you know when that has happened?<\/p>\n

Another problem is that fund managers have much less cash to invest then, because many of their clients have fled the stock market for the relative safety of bank deposits. At the very point when future returns are going to be excellent.<\/p>\n

Rebalance portfolio assets periodically<\/strong><\/p>\n

Trouble is, this can mean shifting capital into assets that are in a long-term downtrend. Bernstein gives as an example a portfolio split 50\/50 between US and Japanese equities, with annual rebalancing. Over the period 1990 to 2009, you would have earned an average of 3.64 per cent. But if you had avoided all rebalancing \u2013 no buying of declining Japanese stocks \u2013 your return would have averaged 5.16 per cent.<\/p>\n

Diversify<\/strong><\/p>\n

Trouble is, the fundamentals on which you base your asset purchases can change. For example, it used to make sense to buy commodities futures and hold them to maturity to harvest an automatic return called \u201croll yield.\u201d But as investors piled in, the roll yield disappeared.<\/p>\n

Also, commonsense logic can be wrong. For example, emerging markets can seem appetizing because of high economic growth. But that doesn\u2019t mean the shares go up, as investors in China have discovered. Others find ways to reap the benefits.<\/p>\n

Your portfolio will, from time to time, get hammered by negative returns. And some of them can be severe, such as the 90 per cent fall in US shares over the 1929-32 period, loss of half their value in the wake of the sub-prime crisis, or the 20 per cent drop on Wall Street on a single day in October 1987.<\/p>\n

But those are \u201calmost always short-term events\u201d followed by recovery. The major risk is long-term failure to accumulate enough capital to finance your consumption needs after you retire, when it\u2019s too late to rectify shortage or replace losses.<\/p>\n

The four dangers are:<\/strong><\/p>\n