The Full Motley: 1Q, 2012 (supplement)

I have never done an entry like this one before, but I wanted to do it because I noticed today that my 401(k) balance has tripled since February 2009, and I haven't even contributed to it since last April.

Last week I made my first quarterly rebalance of 2012, and I noted that the benefit of anchoring your portfolio around your asset allocation and rebalacing to your target allocation at predetermined intervals is that it takes the guess work out of investing, and then, (A) you don't have to hire a professional, and (B) you won't react emotionally, and you'll make wiser moves in the long-run by focusing on the long term.

Therefore, you never want to reassess your moves after one week since it just increases the temptation of reacting emotionally, but if you have the self-discipline to check your portfolio's performance frequently while holding true to your allocation & intervals, then there isn't much harm in checking in more often.

That was the case today when I heard that the markets were up, but I was curious how the recent string of increases had affected my portfolio.  Out of curiosity, I checked the price per share from last week when my reallocation took affect to the most recent price per share in the market.

• 24 = $79.16 < $81.03 (higher)
• 29 = $5.85 = 5.85 (even)
• 59 = $66.31 < $67.20 (higher)
• 84 = $11.03 > $11.02 (lower)
• 85 = $32.55 < $33.01 (higher)
• 113 = $28.72 < $29.20 (higher)

Four of my six funds have gone higher (including BOTH of the funds that I moved out of) and the total decline in the other two funds was only $.01.

There are two ways to analyze this information.  On the one hand, I could have been better off staying in the two funds highlighted in red for another week (which indicate the funds where I pulled money out yesterday).  On the other hand, the money I took from those funds has already been made back so the higher performing funds are already returning higher and the "profits" taken from there are holding stable or increasing in their own rights.

Obviously, making another change today would be foolish based on the small balance in my portfolio, but if you wanted to invest in an allocation that rebalanced frequently (such as daily), then the best fund for you is a "fund of funds" or a balanced fund which sets an allocation closely matching your preference.

Incidentally, the Target Retirement funds are a perfect example of that philosophy.  They have an allocation, and their investment managers seek to maintain that allocation daily, regardless of market performance.  While they miss out on having a large stake in the funds as asset classes that are rising, they also avoid giving their earnings back when those asset classes retreat.  As I've noted often in this blog, all investments fall much faster than they rise.

In my opinion, it is not worth the investment risk.  And, without question, it isn't worth the time investment to track your investments daily over the 30+ years.  If anyone had that much "spare" time, then I'd strongly recommend volunteering somewhere.  Life is about more than just money (although, understanding investments is invaluable knowledge).

The Full Motley: 1Q, 2012

It has been a long time since I have talked about my personal accounts on here, but the lack of updates does not reflect a lack of knowledge.  After erroneously rebalancing a month ahead of schedule on July 10, 2011, I furthered the "error" by rebalancing again on October 10, 2011 (a month ahead of schedule) since I felt the markets retracted more in September and it would be corrected by November.  That thinking is exactly what asset allocations are created to avoid.  Normally, the schedule should be what you do and speculation should be on what you are not doing.  Unfortunately, for my purposes, I cannot say that my early moves were a bad thing for my portfolio.  But I will say that they did not pay off much either.

This month I intentionally got back on schedule, and I was very pleased with how well my portfolio has performed since October 10th.  The funds that I discuss on these entries are in my 401(k) and in the past, I had been adding money into the funds at all times.  I left my job in April, so no money has gone into that account since then, and the balance is now higher than it was when I left, which is encouraging.  In my last entry, I noted that I expected the 2012 markets to raise higher than 10% as measured by the Dow, so I expect another summer slump, but I have another rebalance on May 10, 2012, which should be before the market retracts.

As for today's moves, here is my chart:

Fund # - Real / Current / Target
Fund 24 - 26% / +1% / 25%
Fund 29 - 5% / 0% / 5%
Fund 59 - 25% / 0% / 25%
Fund 84 - 9% / -1% / 10%
Fund 85 - 25% / 0% / 25%
Fund 113 - 10% / 0% / 10%

In the interest of full disclosure, although this blog should never be used as the primary tool for financial planning on any account except the one listed, there were additional moves made in which money was taken from two stronger-performing funds and placed into four lagging funds to preserve the target allocation, which is the point of rebalancing quarterly.

I only mention this caveat to note how pleased I was to see how well those two funds had performed since October.  The trickiest part about asset allocation is the actions in contrast to urges and expectations.  I mentioned how I failed twice last year by rebalancing a month ahead of schedule, but it is equally important to note that this move takes money out of stronger performing funds and put them in funds that are performing not as well.

Every financial analyst knows the reason for that move would be to "buy low, sell high," but the problem outside of rebalancing is, when you sell, you have to put the money somewhere.  If a fund earns 25% over a quarter, and you want to "sell high," where is it going to go?  If you need it, then that's an option but it does not allow for further growth.  If you sell for the sake of selling high, then you probably know it is going to a stable value fund or a lesser performing fund.  But if you analyze the move, then there is a strong likelihood you will decide to hold the excess where it is.

This quarter reminds me how much rebalancing simplifies this struggle.  It is like cleaning house in a way.  Each fund has its set place, and if one fund gets moved over to one side or another, then you just move it back where it belongs without thinking about it as taking money from a "winning" fund and putting it into one that lags.  When those choices start getting the better of your mind, then reconsider the allocation.  But, as I've noted previously, when you adjust your allocation, then the new allocation should be decided upon about six months before the first action is made on the account.

I'm sure future entries will discuss this concept further, even though I am very comfortable with my current target asset allocation.

CNNFN: Dow at 4-year high, Nasdaq hits 11-year high

NEW YORK (CNNMoney) -- U.S. stocks rallied Friday, as investors cheered a much stronger-than-expected jobs report.

The Dow Jones industrial average gained 157 points, or 1.2%, the S&P 500 added 19 points, or 1.5%, and the Nasdaq composite increased 46 points, or 1.6%.

The rally pushed pushed the Dow, up more than 5% in 2012, to its highest level since May 2008. The Nasdaq, up more than 11% for the year, climbed to its highest level since December 2000. The S&P 500 has gained almost 7% this year, and finished at a six-month high.

The rally was sparked by the Labor Department's monthly jobs report, which showed that the U.S. economy added 243,000 jobs in January, far exceeding expectations. The unemployment rate dropped to 8.3%, the lowest since February 2009.

Economists surveyed by CNNMoney had expected the government to report an increase of just 130,000 jobs in January. The unemployment rate was expected to rise to 8.6%.

Economists had expected a slowdown in post-holiday hiring, considering that about 40,000 temporary couriers were hired for the holidays alone.

"The jobs data blew away market expectations," noted Marc Chandler, global head of currency strategy at Brown Brothers Harriman, calling it a "monster" jobs report. "This coupled with other recent reports for January, show the year has begun off on a firm note," he added.

Meanwhile, investors were also on the lookout for an official agreement on a debt-reduction plan and a second bailout for Greece. The deal is expected to be near, but negotiations are likely to continue thorough the weekend.

U.S. stocks ended mixed Thursday as investors digested a cautious economic outlook from the chairman of the Federal Reserve.