Unbalanced Portfolios Cause Falls

In every horse race there is one winner and a bunch of losers. Yet, by nature, we humans are ever optimistic - that's why we bet on horse races even though the odds are never in our favour. But every once in a while we win - and that's when another aspect of human nature kicks in: the optimistic tendency to 'ride a winner.'

Many investors carry that 'ride a winner' philosophy into the selections in their portfolios and that is usually a very risky investment decision - here's why:

If you're an investor, you have no doubt looked into effective investment strategies and one of the most effective is to build a diversified portfolio in which you divide your investments within and across asset classes to take maximum advantage of market conditions and economic changes while protecting yourself against downturns.

You may even have created such a portfolio for yourself and then you let it get out of whack, because you are after all, an optimistic human.

You see that some of the investments in your portfolio are real winners while others are lagging. So you switch to the 'optimistic' strategy of 'riding a winner' and transfer an additional portion of your assets from the 'laggards' to the 'winners'.

And just like that, your balanced portfolio becomes unbalanced and ripe for a fall. Study after study and investor experience in capital markets that always include a degree and sometimes a high degree of volatility have proven without a doubt that a properly diversified and balanced portfolio strategy is the best strategy over the longer term.

Large institutions, foundations, and other organizations that make huge investments know that a balanced portfolio is a 'best practice' investment management strategy. And they also know that when a portfolio swings out of balance, it's time to rebalance it.

The same holds true for individual investors like you. Every so often, it's necessary to rebalance your portfolio to bring it back in line with the original allocations that match your personal tolerance for risk, your age and family status, and your financial goals. And sometimes that can mean hopping off a 'winner' and reinvesting that money in an investment that has lagged.

Having the discipline to maintain a balanced portfolio and knowing when it is necessary to rebalance can be difficult and complex. A professional financial planner can help keep your portfolio true to your goals.

By: Canadian Financial Guy

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