The Full Motley -- 3Q, 2014

I had reallocated my assets on Monday as I do each quarter, moving only a small fraction of my account (two-thirds of 1%, to be exact), and then at lunch on Tuesday, I happened to hear a discussion on Money Radio 1510, discussing the allegedly over-inflated research in favor of reallocating periodically, specifically noting that re-allocating monthly or quarterly was pointless. While I support some of that argument more than my actions would suggest (I honestly do not believe moving 0.67% of an account is critically important for long-term financial success), there are a lot of additional benefits to reallocating that the hosts of this talk radio program grossly (or, conveniently) overlooked.

First, periodic re-balancing keeps you thinking. Specifically, thinking about your future and your investments. Two things that, while I may not have any problem finding time to do so in the middle of the day, many others fail to consider. Granted, to the point of the show's hosts, over-thinking is a common pitfall for novice (and even expert) investors, but, to my point, neglecting it is on the opposite end of the spectrum and more detrimental in the long run.

Secondly, contrary to that program's apparent belief, not every piece of financial advice should be made in order to maximize profits. There are many things that are recommended solely to reinforce good habits and establish discipline.  That discipline in particular will prevail with cooler heads whenever the markets get particularly emotional (e.g., market corrections).  Periodic re-allocations can be one of those habits.

Furthermore, the downside of their argument against reallocating was that the initial allocation is completely arbitrary.  The hosts are professionals in the industry, so maybe they have clients often come to them devoted to a strict allocation, only to learn later that this allocation was generated by a computer program or an even more impersonal method.  Regardless, dismissing re-allocations based on the validity of the target allocation is where I mostly took a defensive stand.

The largest purpose of reallocating small amounts, such as monthly or weekly or daily reallocating will do, is to achieve rule #1 in investing: buy low, sell high. Until your target allocation changes significantly, generally due to the natural process of aging, there is no better method to move money out of inflated assets or move money into deflated assets than reallocation.  Because the amounts being moved are small and because these re-allocations are predesignated periodically, there should be no decisions to second-guess or no bad news to cause an adverse reaction in a temporary panic.

Another good habit for long-term financial success is diversification.  This year, I started adopting many more markets and sectors in my Roth IRA, including the gold (metals) market, healthcare sector, and 3D technology sector. Diversification can get you far, but there is a limit to its fruitfulness. Most people know that there is such a thing as over-diversification, but few would say that issue negates the benefit of diversification altogether. Same goes for re-allocations. Dismissing either strictly for its limitations is throwing the baby out with the bath water.