Markets Remain Volatile – Protect Yourself With Diversification and Portfolio Balancing

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I fully expect the markets to remain volatile over the next two to five years as the worldwide economy and financial markets work off the imbalances made apparent by the “great recession”. This heightened volatility coupled with a domestic equity market that is, my view, pushing the upper limits of its valuation range (Shiller PE of 23.4; 87th percentile) affords the need for passive investors to become a little less so.

Two strategies these “passive investors” can use to protect themselves and enhance returns are diversification – true diversification, not just stock and bonds – and portfolio balancing. Diversification is important as one asset class may outperform one year and another the next. Re-balancing is key as you hope that selling a portion of your winning asset classes and buying the underperforming ones which will later become the over performing assets. According to Ed Easterling at Crestmont Research (pdf) the impact of re-balancing annually versus bi-annually (every other year) is a 1.3% benefit annually during bear markets and a 0.3% loss during bull markets.

Continue reading this post here.


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