Portfolios and Human Nature

Adhering to a well designed strategic investment plan requires tremendous discipline and courage to challenge our human nature. Our natural instinct tells us to buy the mutual funds that are performing the best (the ones we like) and sell those that have declined (the ones we dislike). Take note, many investors succumb to these desires to chase good performance or dodge negative returns based on greed and fear. As a result, investors tend to buy as the markets rise and sell as they fall. Clearly, you cannot make money when you are purposefully "buying high" and "selling low." This is one of the many reasons that savvy investors benefit from executing a strategic investment plan and the process called rebalancing.

Rebalancing is the process of selling some of those asset classes that have performed well, and buying some of the asset classes that have underperformed. Research and common sense shows that the returns of an asset class tend to revert to the mean. Therefore, in addition to reducing risk, rebalancing provides a disciplined mechanism for consistently "buying low" and "selling high." Portfolio rebalancing has the effect of reducing the risk of your portfolio, and it may also increase your long-term rate of return. Over time, you will find that certain asset classes will perform better than others in your portfolio and rebalancing allows the investor to maintain the desired asset allocation percentages (as defined in the Investment Policy Statement).