Keeping things simple can often help us stay focused on our goals. But sometimes, oversimplifying can hurt us.
Take what’s likely the most frequently cited “simple advice” in investing: “Buy low, sell high.” On its face it seems like a pretty straightforward strategy.
But how many people know how — or even attempt — to do it? Greed and fear have many individual investors doing exactly the opposite — buying (or holding) high, and selling (or not holding) low.
Note that that phrase does not call for buying at the “lowest” or selling at the “highest,” which is, of course, impossible to do on a consistent basis. It simply recommends a process of harvesting those holdings that have done well, and reseeding a portfolio with holdings that have underperformed.
This, essentially, is what rebalancing a portfolio is all about: a prudent strategy for managing an investor’s overall risk. Most people think that “buying low and selling high” is the magic formula for above-average returns, but, in fact, is a strategy for protecting a portfolio from above-average risk.