Rebalancing Based On Wants

This thought-provoking article appeared in a recent edition of the Wall Street Journal.  The article offers a different opinion on how investors should think when they rebalance their portfolio.  Its ideas could offer some people a clearer way to think about their portfolio and their investment goals and could save them some time and money in the process.  Here is a link to the article titled “A Better Way to Think About Portfolio Rebalancing”.  

Risks vs. Wants

Dr. Meir Statman, Professor of Finance at Santa Clara University and the author of the article, says that instead of thinking about Risks of your portfolio, you should think about your financial goals, which he calls Wants.  Dr. Statman further whittles the universe of Wants down to two:  the desire to be Rich, and the desire not to be Poor.  I think that is a great way to think about your own investment goals.  Do you want to become Rich?  Or do you just not want to be Poor?

Offense vs. Defense

The desire to be Rich will probably mean taking a more offensive posture toward your portfolio construction. It will probably mean you will start out owning a higher percentage of equities, and it will probably mean you won’t rebalance your portfolio back in line when your equity percentage as part of your overall percentage grows due to growth in your equities.  If you want to become rich at the outset, you probably will still want to become rich as time goes on.  This will probably mean you won’t rebalance back to a 60/40 equity/fixed income split in a year or two.  

However, as you get older, probably much older, and your children are off the payroll and you are comfortable, perhaps your goals change from “get rich” to “don’t become poor”.  This would call for a more defensive portfolio:  stocks that are not as cyclical or subject to market risk, a more diversified portfolio, and probably a higher percentage in fixed income securities.  Once you change from “get rich” to “don’t become poor”, you probably won’t go back to “get rich”, and so you may not need to rebalance as often once you have the portfolio that meets your goals.


This all points to having a goals-based financial plan.  It is difficult to come up with your goals in a vacuum.  It is much better and easier to do so by working with a financial planner who can help you with your thought process.  We financial planners are taught to work with clients to articulate financial goals that are quantifiable and achievable.  Dr. Statman doesn’t go that far; he just wants you think about whether your goal is to “get rich” or “not be poor”.  That’s at least a start.  From there, you and your personal planner can work to quantify what “rich” or “not poor” means and construct a portfolio to get you there.

What Is Risk?

When investors use the term “Risk”, what do they mean?  For institutional-level investors, the answer to that question may not be what you think it is.


Risk is not just a board game.  It has several meanings to investment managers.  When ordinary investors talk about Risk, they probably equate Risk to the possibility of losing part or all of their investment.  To most of us, a “risky” investment means one that could more easily go wrong such that you won’t get all of your money back when you sell your investment.  That’s not a bad way to think about it, but there is more to the concept of Risk than just maybe losing money.

Not the Desired Outcome

If you take a step back from that standard definition of Risk, you might think of another meaning of Risk:  that actual investment returns don’t equate to projected or desired returns.  When you make an investment, such as the purchase of a stock, you have some expected return in mind.  If you don’t, you should.  The chance or the probability that your actual returns will be lower than your projected returns is the Risk of that particular investment.

Market Risk

Regarding stocks, there are two types of risk.  The first is called Systemic Risk or Market Risk.  This is the risk that the entire market will sell off and your stock will sell off along with the entire market.  Most stocks’ returns are highly correlated with market returns.  In theory, you can’t diversify your market risk by buying other stocks because all stocks are subject to market risk.

Company-Specific Risk

The other risk for stocks is the risk that is company-specific.  This is also called non-systemic risk.  This risk relates to how well your specific company is managed, and how well it performs relative to other stocks in its sector and other stocks in the market in general.  An investor can diversity non-systemic risk by buying other stocks.  The more stocks you own in your portfolio, especially different stocks among different sectors, the less subject you are to company-specific risk.


There is also the Insurance definition of Risk, which is the situation where the probability of a variable is known but where the mode or actual value of the occurrence is not known.  You know that there is a possibility that your house can catch fire – that’s a risk – but you don’t know if it will ever catch fire or when it will catch fire.  In general, it is similar to the securities definition of risk, which is that something bad or unexpected might happen.


Risk doesn’t just mean losing money or the possibility of losing money.  Risk also means that you make money, but not as much as you expected to make.  You might someday get into a conversation with another investor or investment manager about the concept of Risk, and you should know what they mean when they discuss Risk.  It is not the board game by Hasbro.

StrengthsFinder 2.0

StrengthsFinder 2.0 is a self-help book written by Tom Rath and published by Gallup, of polling fame.  The book itself is short but, by buying the book, you are granted entrance into the StrengthsFinder website, whereupon you can take a self-assessment test.  The assessment test is the real value of the book.  The test asks you various questions.  When you finish the test, based on your answers, the website immediately gives you its results, meaning it tells you what your greatest personal strengths are among 34 strength traits that the book delineates.  The results are given in a very positive manner such that anyone who takes the test and gets the results will feel good about themselves no matter what the results of the test are.  

A Publishing Phenomenon

Publishing Phenomenon

StrengthsFinder 2.0 has been a publishing and sales phenomenon as about 20 million copies of the book have been sold cumulatively since its initial publication in 2007, according to the Gallup website.  I think this has to do with the desire of people to know more about themselves (as also shown in the rise in popularity of genetic testing through and the like) and with the positive way Gallup handles this assessment test.  Brevity also helps.  There have been oodles of self-help books published over the years, going back to How to Win Friends and Influence People by Dale Carnegie or even going back to The Bible.  StrengthsFinder 2.0 has been out there and relevant longer than most.

My Strengths

The assessment test spits out your 5 greatest strengths out of 34.  My 5 greatest strengths are:

  • Learning
  • Ideation (coming up with ideas and presenting them)
  • Relating to others
  • Empathy
  • Arranging or ordering things

I feel like, for me, the assessment test provided an accurate account of my strongest abilities.  As you can see, they are general abilities and not specific to any field or discipline.  You can take it the next step and think about what type of work you should get into given the strengths you have.  However, for me it is useful to know that this self-assessment confirmed what I am good at.  


If you haven’t already done so, I highly recommend buying StrengthsFinder 2.0 and reading it and taking the test.  The first step of financial planning is taking an assessment where you are financially with your life, and part of that is to understand yourself better.  Your skills and personality can change over time (that’s why we go to College and work!) and so you should know where you’re at before you can know where you’re going.  Sounds like a Bob Dylan lyric, but it is true.  If you are thinking of jumping on the bandwagon and spitting into a cup and mailing it in, then you should also buy StrengthsFinder 2.0 and take the self-assessment test.  It will help you make a financial plan that works for you.

200 Day Moving Average

I like to write about the significance of various technical indicators and so today’s topic is the 200-Day Moving Average.  200 trading days is about 40 weeks of trading, and so the 200-Day MA encompasses the better part of the previous year of trading.  For that reason, it is a good technical indicator of the long-term trend of a stock’s trading pattern.  


The 200-Day MA is a standard technical indicator that you can easily find on any free stock charting service, such as  In this chart of the S&P 500 Index ETF (SPY), the 200-Day MA is the red line that has a current value of $273.39 as highlighted:

You can see that the 200-Day line is pretty constant and doesn’t have much variability, due to its having 200 data points.  You can easily tell what the 200-Day MA is on this or on any stock chart.


  • Its main use is to see where the stock is currently trading in relation to the 200-Day MA.  If the stock is trading above the 200-Day line, then the 200-Day line is likely to continue to move upward. 
  • The alarms go off, however, when the stock falls and threatens to fall below or actually does fall below the 200-Day line.  This is likely a signal to Sell if you own a position in the stock, and a signal not to buy if you are just looking at it.  It means institutional money is selling the stock, or that something has changed in the company or the sector or in the market in general such that the future is probably not rosy. 
  • Another bearish sign is if the 50-Day Moving Average line dips below the 200-Day MA line.  This is called a “death cross” and could occur even if the current price of the stock is above the 200-Day line.


I sell long positions that dip below the 200-Day Moving average, if I haven’t already sold them.  Don’t hold on to losing positions in the hope that they will rebound and you can recoup your money.  You may recoup your money, but it may take a long time and at an opportunity cost of missing out on other positions that may outperform your losing position.  The 200-Day MA can work as well for index ETF’s as it can for individual stock positions, perhaps even better because there is so much trading information inherent in an index ETF made up of that many individual positions.  Just be aware of that stable red line on most free stock charting services and know what it means and how to use it.


Get Help To Make Decisions

Think about how difficult it is sometimes to pick what you want from a menu at a restaurant.  How do you make that decision?  Do you base it on what you feel like eating that evening?  Or on what this restaurant specializes in?  Do you consider what you ate yesterday or what you are planning to eat tomorrow?  

Choosing a meal is a small decision.  No matter what you choose, you will be hungry again the next day and want another meal.  Time passes.

Decision Tree

Big Decisions

By contrast, what you do with your finances are big decisions that are difficult to make for a number of reasons, including the following:

  • You may not know what you want, or what your goals are.  The currently topical field of Behavioral Economics teaches us that individuals are very bad at knowing what their goals are, especially in the context of big financial decisions.
  • You may not know what your options are.  This may have to do with a lack of knowledge of the current law, or of potential financial solutions that are out there in the marketplace.
  • You may not know what your current resources are or what you are capable of.  It is difficult to comb through one’s own finances and understand where they currently sit, which is the first essential step to determine where they want to go.

Get Help!

Without knowing your situation personally, the best piece of advice I can provide is that you need to get help from a qualified financial planner as you set goals and make decisions to set out on a path toward achieving those goals.  Even in the restaurant situation I describe above, you might enlist help from others around – your dining partners, for instance, or the wait staff.  If you are self-confident and feel like you make good decisions without the help of others:  All the more reason to work with a financial planner, because you might have what is called Confidence Bias in Behavioral Economics.  Most importantly:  Don’t rely on a spouse as your financial planner.  There is too much other baggage in a marriage relationship to make good financial decisions without enlisting the help of third-party experts.  Yes, you need to work with your spouse, but the married couple together in turn needs to work with the third party.  


There is a new book out by author Steven Johnson titled “Farsighted”, which is about how to make good decisions.  Reading a review of the book gave me the idea to write this blog.  The act of reading a book such as this or Googling “How to Make Decisions” and reading the articles that pop up is itself a way of getting help to make decisions.  Why not, instead, work with a financial planner who is trained to work with people to help them set goals and make and implement plans to achieve those goals?  I know, financial planners are more expensive than books and free articles.  However, as with anything else, you get what you pay for.  You are going to get a more personalized and valuable experience by working one on one with the planner, and you will likely easily recoup the money you spend on the planner.  Please feel free to contact me if you are having difficulty sorting through your financial life and figuring out where you want to go next.

Cannabis As An Investment

More and more states are legalizing cannabis and its by-products for medicinal and even recreational use.  As its legal use grows, companies will get involved in all aspects of cannabis – cultivation, formulation, distribution, sales, and marketing.  Cannabis companies may start to look like other companies.  Some are already publicly traded.  Does that mean there are investment opportunities for the individual investor?  Possibly, but there are a lot of issues to overcome before cannabis can enter the realm of institutional-quality so that it can attract large chunks of money.

It Is Still Illegal at the Federal Level

The biggest problem for cannabis is that it is still illegal at the Federal level.  The Feds have made noises but have as of yet not made efforts to negate individual state laws that have legalized cannabis at some level in their states.  My guess is that it will still be a while before the Feds legalize it – I doubt the Feds will go the other way and crack down on the states.  

A number of problems fall from the fact that cannabis is still illegal:

  • Just on the surface, it would be bad optics for an institutional-level investor such as a pension fund to invest in a company whose product is illegal, even if it is “legal” in some states.  
  • Companies involved in cannabis currently have and will continue to have a difficult time gaining banking relationships.  This goes all the way to even having a deposit account at a large national bank.  Is there much difference between a company that sells cannabis and the street corner marijuana dealer, in terms of what they can do with their sales revenues?  Not much, if you look at it at the macro level.  Even larger cannabis companies still can’t get standard banking relationships.  They have to do business the old fashioned way – in cash.  Meaning, these companies have to hoard stockpiles of cash.  Not exactly a modern or efficient payments system.

Drug Approval

Another problem that prohibits institutional investment follows from the drug approval process.  One reason for the growing use of cannabis is its reported medicinal qualities.  My thought is, if some cannabis producers tout its ability to alleviate depression or what have you, why don’t they just go through the FDA process and get cannabis approved as a drug by the FDA, just like any other pharmaceutical company must do to get its drug approved?  Well, the problems are 1) cannabis is illegal (see above); and 2) companies can’t patent it.  With other new drugs that get approved by the FDA and come onto the market, the pharmaceutical company that developed the drug has patented the chemical mixture that comprises the drug.  That can’t happen with cannabis because its use is already widespread – the cat is already out of the bag.  Now there are companies that are trying to use the FDA process but they are small-scale thus far.  Again, until the Feds give cannabis some legal status, the FDA is not likely to get involved, and cannabis will not grow to be a drug class like any other standard drug class.  As a result, it will continue to be shunned by institutional investors.


If you find a flyer opportunity at the company level in the broader cannabis industry that you think could take off, by all means give it a shot, but keep in mind it will be an uphill battle for the foreseeable future because institutions including banks won’t touch it.  Don’t bet the farm on cannabis.

Is Dividend Investing For You?

I read an article on another website that touted a stock because it payed a dividend of in excess of 6%.  Sounded intriguing to me, so then I checked its chart and found that the stock is down about 14% YTD in 2018.  Rising interest rates are usually bad for dividend stocks.  You get the 6% dividend but the value of the stock has gone down 14%, so despite the dividend you are down 8% for the year.  Granted, the stock in question could have gone up as easily as it could have gone down.  But, even with the dividend, you are at risk for losing principal value.

Dividend Companies

In my opinion, if you invest in a company that pays a relatively large dividend, plan on the dividend comprising the bulk of your return on that investment.  Your stock may prove to be a hedge against inflation, particularly if it is a real asset-heavy company such as a real estate company or oil and gas.  However, don’t invest in a dividend play if you are looking for substantial growth in your capital.  The reason for this is intrinsic:  Companies that pay dividends are typically more mature companies that have already gone through their growth phase.  Think about it:  A company makes money by selling a product or service.  It can do two things with the leftover money after it pays its workers:  1) It can retain its earnings and plow it back into the company in the form of research and development or acquisition of new assets, or 2) It can pay it out to its existing shareholders in the form of dividends.  Companies that choose the #2 option of dividends typically already have enough money to fund their growth, and have calculated that any additional investment back into the business that they currently see would not be “accretive”, meaning its marginal return would not be equal to or greater than the return they already make on existing business.  Therefore, these companies conclude it is best to let the shareholders do what they want to with the money that they earned, perhaps by investing it in other companies.  Other companies, such as Real Estate Investment Trusts (REITs), pay high dividends because the tax code incents them to do so:  REITs don’t pay taxes on income that they pass through to investors.  

Mature Companies = Mature Investors

Investors who are seeking dividend returns are typically more mature (in age) investors, at or near retirement, who are seeking to bolster their income.  If you think about it, that fits the profile of the companies that pay the dividends:  Mature companies that want to live off of the fruits of their labor.  We’re older and ok with where we are in life right now, just with a little more income.

Safety of Principal

The trick, if you are a dividend investor, is to try to retain as much capital as you can so that if you have to sell it you get your money back.  That is why dividend investors should invest across a number of companies and a number of asset classes.  For instance, large oil companies typically pay dividends.  However, if the price of oil goes down, the stock goes down (and the yield probably goes up unless the company cuts its dividend, which typically doesn’t happen).  So, you don’t want to be overweighted in the oil business.  Think also about other companies and other sectors that pay dividends, such as the aforementioned REITs as well as utilities and many other large industrial companies.  Even Microsoft pays a dividend (1.5% – one could argue it should be more with their current cash hoard).  


Look at dividend investing as the dividend plus a potential hedge against inflation.  Look at dividend stocks as an alternative to bonds, but with more risk.  If you diversify your holdings, you may minimize company- or industry-specific risk and you may be able to achieve your goal of a healthy cash flow through the dividends plus a principal balance that may at least keep you even with inflation.

Hurricane: Am I Covered?

You may think that only people who live in vulnerable areas on the East or Gulf Coast are subject to hurricane risk.  However, what if the hurricane moves 200 miles inland and drops 10 inches of rain that causes rivers to flood?  Will standard Homeowners Insurance cover damage from a hurricane 200 miles inland?  Probably not.

Homeowner’s Insurance

Most home owners have standard Homeowner’s Insurance.  The standard rule is:  If the damage occurs due to something falling from above, you are covered, but if the damage occurs due to something rising up from below (such as water or flooding), you are not covered.  “Yes, but it was the rain from above that caused the flooding from below to happen.  Doesn’t that mean I’m covered?”  The insurance company doesn’t view it that way, and they have a lot of legal precedent on their side.  You will not be covered if a hurricane (or any big storm) hits and the resulting storm surge or flood infiltrates and damages or destroys your house.  Sorry!

Flood Insurance

The best way to be insured against floodwaters is avoidance:  Don’t live near a body of water or in a flood-prone area.  Live on high ground.  However, if you are already there, you should think about buying a separate Flood Insurance policy.  Some mortgage lenders require it if you live in a FEMA Flood Zone.  The dominant Flood Insurance provider is the National Flood Insurance Program, backed by the US Government.  Their insurance has caps on coverage, has high deductibles, and is expensive.  In other words, it’s not very good, in my opinion.  However, it is the only game in town for much of the US.  There is private insurance available in some states and some areas, so you might want to check those out, but don’t get your hopes up.  Flood insurance is hard to get.  Like I said, don’t live in a low-lying area.

Windstorm Insurance

If you live in a hurricane- or tornado-prone area, your Homeowner’s Insurance may not pay for damage directly caused by the wind, such as the wind directly blows the shingles off of your roof.  You may need a separate Windstorm Insurance policy to cover direct wind damage.  There is no Federal Windstorm Insurance, so you have to work with private insurers.  I don’t have experience with this type of insurance, but Google it and a number of insurers will pop up.  I would expect low levels of coverage and high deductibles.


If you live in a coastal East or Gulf Coast area and you want to be For Sure For Sure For Sure, then you want to have Homeowner’s, Flood, and Windstorm Insurance policies.  All three.  Very expensive, and possibly difficult to find and with high deductibles and low caps on coverage.  Hope it is all worth it to you.  People who are not adequately insured may try to look to the Federal or State government for help.  This is politically controversial.  The media shows images of flooded homes and then interviews the owners afterward inspecting their flood-damaged homes, and so it becomes politically difficult to deny helping these people.  Then, if you think about it, many homes that are directly on the beach front are very expensive.  You have to pay up for that beautiful ocean view.  Some of these may not even be primary residences for the owners.  If these wealthy beach front home owners are flooded out and are not adequately insured, how does it look politically to bail them out?  Probably not good for them specifically, but they get lumped in with the poor people inland who are flooded, and so they get the benefit.  That’s why we get into the $Billions of damage for some of these big storms.  Avoidance is your best insurance, if you are able to avoid these hurricane- and flood-prone areas.

Emerging Market Investing

Investing in emerging markets sounds like a great idea but it is difficult to do successfully if your native currency is the US Dollar.  It is difficult for a number of reasons, including the following:

  • Some emerging market currencies are not easily convertible to US Dollars at a reasonable exchange rate.  
  • Some countries do not allow direct investment in their businesses by Americans or any foreigners.
  • Tariffs can really hurt emerging market economies, both because of the added cost of the tariff and because of the political uncertainty associated with them.
  • The exchange rate will continue to be a problem even after you have invested your money.  Right now, for instance, the US Dollar had been killing emerging market currencies.  Emerging markets have been significantly hurt by extreme devaluations particularly of the Argentine Peso and the Turkish Lira.  
  • Interest rates:  The US has been raising interest rates while most of the emerging market world has not.  The result of this differential in rates is that the US Dollar goes up and emerging market currencies go down.  So, even if an emerging market company is performing well in its native currency, Americans investing dollars in that company may be losing money because of the currency effect, which is largely driven by differences in the direction of interest rates in the respective countries.
  • Want to buy a mutual fund that specializes in emerging markets?  That is a possibility, but do your research before you buy.  Many emerging market mutual funds charge high expenses – reasonably so due to the travel and other expenses commensurate with managing investments in emerging markets all over the globe.  Go to and research the holdings of the fund that you are interested in.  Many of these funds’ top holdings are banks and financial services companies domiciled in emerging markets.  You think about Emerging Markets and you think about cheap labor for manufacturing and you think this is where all the money is being made.  However, many emerging market industrial companies are not publicly traded.  As a result, the fund managers revert to owning financial service companies, which is a derivative play with respect to where the growth in these emerging markets is.  My point is, you may not be getting a true emerging market investment experience when you invest in emerging market mutual funds.
  • This includes ETF’s.  The largest emerging market ETF is the EEM, which tracks the iShares MSCI Emerging Markets Index.  Its two largest holdings are Tencent (China) and Taiwan Semiconductor, both of which are huge companies.  Country-specific ETF’s, of which there are many and probably one for any country you can think of, are also weighted toward the largest public companies in each country.  Nothing wrong with any of that, but you are investing in large companies, including many banks, when you invest in ETF’s such as the EEM or country-specific ETF’s.  
  • There are alternative investments such as hedge funds and private equity that specialize in emerging markets, but you really have to know what you are getting into, and you will likely pay high fees and be unable to cash out when you might want to.  


I view Emerging Market investing as a component of a well-rounded portfolio.  It makes sense that, while the US is the world’s largest economy, it is not the majority of the world’s economy, and that there are probably some great growth opportunities in emerging markets.  With the way emerging market investing is currently constituted, you can capture some great growth opportunities through investing in mutual funds and ETF’s, but it is difficult to find a pure play in emerging markets.  Another way to view emerging market investing is as a hedge against a weakening US Dollar, if current trends reverse and the Dollar starts to weaken.  

Clean Out Your Cupboard

My wife and I recently cleaned out our cupboard. We had bought some new cups and glasses and the cupboard was now too full. It had been several years since we had cleaned up the cupboard and we had accumulated a lot of items that we found that we weren’t using. Our children are either working (and off the household payroll!) or away at college (and still very much on the payroll). So, a couple of weeks ago, it was out with the old and in with the new! Most of the “treasures” that we either tossed or donated probably won’t be missed – we didn’t talk with our kids about this. Now the cupboard is much less crowded and much easier to deal with. Now it is a joy to open it up and see all of our glasses and cups properly arranged and easily accessible!

The Moral 

The moral of the story:  Clean out your own cupboard, in the greatest meaning of the phrase.  As we get older (and we all do), things we accumulated over time may not have the same application or use now that it did when you bought it.  When you get to a certain age, you want to move forward with less, not more.  It’s easier to maneuver that way and things are more orderly.


This goes for investments as well as for personal possessions.  A stock you bought several years ago may have already run its course.  Maybe you are hanging on to that stock because you haven’t gotten around to selling it, or you think it still has room to run.  Instead, maybe you should sell it now and redeploy the money into something you think can grow at a higher rate, or don’t redeploy it and keep it as a cash gift to yourself.  One way to “clean out the cupboard” in your investments is to rebalance your portfolio at least once per year.  Set a goal of what your asset allocation should look like – say 60% stocks and 40% bonds – and make sure it looks like that every January 2, or any other date of your choosing.  


Just like some people need a personal trainer to motivate them to get to the gym and do their exercises, you may need a Financial Planner to keep you in financial shape.  The Financial Planner will encourage you to clean out your cupboard (financially), not necessarily because they are paid by the transaction, but because it is in their best interest to do so.  Please contact me if you want help cleaning out your own cupboard!