I’m going to tell you a short fictional story about an investor named Jimmy. Jimmy wanted to be on top of all the latest financial trends and make the most of his money. So he built what he felt was a cutting-edge portfolio. His four biggest investments were technology, agriculture, pharmaceuticals, and real estate. For diversity, he invested 25 percent of his money in each of these markets. His technology and real estate stocks began to perform really well, which changed the diversification of his portfolio since the value of the other investments stayed about the same: he was now looking at a ratio of 30/30/20/20. Three months on, it was 35/35/20/10 (agriculture had a bad quarter). All was going so well that Jimmy decided to sell off his underperforming agriculture investments to put into the other high-performing markets. The rally in tech and real estate continued, pushing his portfolio to a ratio of 40/40/20.

Did you spot the investing mistake?

Jimmy’s perfectly diversified portfolio went awry in two ways. First and foremost, the emotion of a stock performing well clouded his judgment. Jimmy allowed his portfolio to lean too far in one direction, opening him up to a higher rate of risk than he had originally planned for. What’s more, he compared his “underperforming” stock to the one that was in a rally, judging it against that exceptional situation. As a result, by selling his agriculture stock when he did, he broke the cardinal rule of investing: he bought high and sold low! But in the cloud of emotions and possibilities, it can seem logical.

Allow me to propose an alternate plan of action for Jimmy. When his technology and real estate stock started to rise, what he could have done was sell off the portion of profit that went above the predetermined ratio he and his financial professional established, and then re-invest it to keep the portfolio diversified, a practice called rebalancing. It’s a simple and brilliant principle that is overlooked because it can feel like you’re going against what the market is telling you. Rebalancing, however, ensures financial security over time in two ways:

  • It eliminates excessive risk that comes from having more money than you intended in any given sector or stock (who knows what is going to happen in real estate next month?).
  • You lock in your profit, as you’re buying low and selling high.

Approaching things from an overly profit-sided perspective can cloud judgement. The opposite approach, one of setting long-term goals that make sense for your retirement plan, building a portfolio with an amount of diversity that reflects that goal, and then regularly updating your investments to keep them on track—there is simple grace and beauty in this.


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Miramontes Capital is a Registered Investment Adviser. Advisory services are only offered to clients or prospective clients where Miramontes Capital and its representatives are properly licensed or exempt from licensure. This blog is solely for informational purposes. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Miramontes Capital unless a client service agreement is in place.