Why We are Bullish and Selling

For most people, one of the hardest parts of investing is deciding when to buy and when to sell stocks and mutual funds. Our firm has a disciplined and rational investment philosophy which eliminates the hard part of these decisions. For our clients, this creates peace of mind and simplifies their lives.

Long term, we are bullish on stocks worldwide. However, throughout the year, we may be selling certain asset classes. Can this be consistent?

Managing a portfolio starts with developing an individualized Investment Policy Statement (IPS). An IPS is a guide for a client’s portfolio. An IPS is based on your specific life situation, such as your age, assets, time-frame and need for income.

The first part of developing the IPS is deciding the overall allocation; how much is to be invested in stocks and fixed income. The next decision is how much of the stock allocation is to be invested in broad asset classes, such as US and International. We structure the portfolio to include specific asset classes, such as US Large, US Large Value, US Small Value, Real Estate, International Small Value and Emerging Markets.

By using asset class mutual funds and an Investment Policy Statement, we can be bullish and selling at the same time. For example, assume that the US Large Value asset class has outperformed most other asset classes during 2014. Due to good performance, it’s percentage of the stock portfolio has grown from the target allocation of 10% to 15%. We would take advantage of the growth and sell the amount which exceeds the target allocation of the US Large Value fund.

This process is called “rebalancing.” Done throughout the year as needed, we provide our clients with investment discipline and the benefit of buying low and selling high.

Investment rebalancing is one way that we adhere to the IPS that we develop for each client. The IPS guides how much risk you want to take. For example, a 60% allocation in a globally diversified stock portfolio may be appropriate for someone. If we were not disciplined and did not adhere to the IPS stock allocation, the stock percentage may grow far beyond your planned 60% stock target allocation. If we did not adhere to the IPS and do our regular rebalancing, you would be taking much more risk than you desired or is necessary.

For example, as the stock market increased significantly during 2013, we selectively sold parts of certain asset classes. We did this to maintain the proper overall stock allocation as well as the specific asset class targets.

When we consider any rebalancing transactions, we are very aware of the potential tax implications. As CPAs, this is another added benefit we provide to our clients. When clients have retirement assets, we try to do rebalancing sales in these accounts first, so there are no tax implications.

When clients add money to their account, we use this as another opportunity to rebalance their portfolio and ensure alignment with their desired asset allocation targets. For example, rather than selling an asset class, we can use the new money to purchase asset classes that have not done as well. This provides the continued discipline and benefit of buying low and selling high.

It would be very difficult to implement this rebalancing concept if you own primarily individual stocks. A key to effectively implementing this strategy is to use asset class mutual funds (similar to index funds), not owning individual stocks.

Rebalancing is a key benefit that we provide to our clients. Rebalancing is dictated by market movements, so we may not be buying and selling to rebalance every month. However, we are continually looking to rebalance so that we can adhere to your investment plan. By taking the emotion out of the selling process, we provide you with greater comfort and security, as well as a more successful investment experience.


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