Conventional investing wisdom I disagree with

[Nika]

I have trouble accepting it.

Let me give you few examples.

1) Re-balancing your porfolio

Why? If I had 20K of apple stock that became 30K, the theory suggests I should sell down to 20.
The problem I see (besides triggering some taxes)is that I now need another place to put that 10K. If I knew of a better place to invest it, I would not need to wait for some guideline to tell me to do that. If I don't, why should I sell?

"Taking profits" wisdom might apply if you are drawing money to live on, but if you are in a stage of life where you re-invest the profits and don't yet need that money to live on, what is the benefit of "taking profits"?

2) Have the percentage equal to your age in bonds.
So if you are 30, you should invest a 3rd of your retirement portfolio in assets you think will under-perform stocks for the next 30 years? You have decades for stocks to recover. Maybe a better strategy to invest only in stocks until you say are 50-55, and than, in the last 5-10 years before needing the money, invest NEW money in bonds.

Any comments?

Any conventional investing wisdom you disagree with?

[disneysteve]

1) Re-balancing your porfolio

Why? If I had 20K of apple stock that became 30K, the theory suggests I should sell down to 20.

That's not exactly what rebalancing means. Rebalancing is about your overall allocation, not one specific holding. So if you decide you want to have a portfolio that is 70% stocks and 30% bonds and due to market gains, you find yourself with 82% stocks and only 18% bonds, you now have a portfolio that is riskier than you intended. You can rebalance by selling some stock. You can also rebalance more gradually by directing new money into bonds. If you put, for example, $200/month into your accounts, stop adding to the stock funds and beef up the bond funds to rebalance that way.

2) Have the percentage equal to your age in bonds.

I think you need to determine your own asset allocation. 100 minus your age for your stock allocation is a general rule of thumb and not a terrible starting point but you can certainly choose to be more or less aggressive from there.

[BuckyBadger]

Steve is correct - you're misunderstanding the point of rebalancing.

Everyone has to determine their own level of comfort and therfore their own asset allocation.

We all have different opinions on investing. For example, I disagree with investing a significant portion of one's portfolio in individual stocks. To each her own.

[bigdaddybus]

That's not exactly what rebalancing means. Rebalancing is about your overall allocation, not one specific holding. So if you decide you want to have a portfolio that is 70% stocks and 30% bonds and due to market gains, you find yourself with 82% stocks and only 18% bonds, you now have a portfolio that is riskier than you intended. You can rebalance by selling some stock. You can also rebalance more gradually by directing new money into bonds. If you put, for example, $200/month into your accounts, stop adding to the stock funds and beef up the bond funds to rebalance that way.

That is a way oversimplified version of how I have been taught to rebalance. Going back to the OP's example of Apple. I have been taught not to put to many eggs in one basket, or in other words not to have too much of your portfolio invested in one thing. (stock or fund)
So in the OP's example if going from 20K in Apple to 30K in Apple put him over X% of his portfolio invested in Apple then he should sell whatever percent gets you comfortably back in that X% per stock level. (X% is an arbitrary number, you could have a portfolio of 6 stocks/funds, so that number should be 16.6% per stock/fund held), whatever the investor is comfortable with. (personally I believe in 6-10, more than that its too much to track/keep up to date on)

Another way I have been taught to invest (by my father, who learned this from watching too much "Mad Money"). If you bought $15K in APPLE and it appriciates to $30K. Sell $15K worth and invest in something else and if you still believe in the future growth of APPLE (based on research) then let the $15K in profit stay in the market and run. If you dont believe in more future growth, sell the entire $30K and buy something else.
I used this approach buying Wells Fargo in 2008 at $8 a share. Sold half weeks later at $16 a share, the remaining shares are currently worth $51 ea.

Just my .02

back to the OP's question.

Since my wife and I have a 100% funded pensions, I have half of our 401K's invested in mutual funds and half in stocks, and I have 100% of our Roth IRA's (which has grown the most) invested in individual stocks. Others tolerance for risk may vary, definately not the conventional "buy mutual funds and hope and wait 30 years mentality" alot of my friends believe in (and the media pushes). IMO whatever the invester is confortable with (and willing to do the research into) varies alot and that is fine. Not everyone gets there kicks from studying financial statements of potential investments. lol

[bigdaddybus]

I'll throw the example of my parents out there for the OP as an extreme example of not following conventional investing wisdom.

My parents retired in 2009.
1. My dad took a lump sum from his employer rather than his pension. (invested all of it)
2. My dad sold his home in IL for $375K
3. My dad bought a house north of Atlanta, GA from a builder going bankrupt for 50% of the original asking price (pd $800K vs $1.6M) and financed $700K at under 4% rather than paying cash for the home. He tracks it on a spreadsheet and can tell you exactly how much greater his net worth is going this route vs the conventional "own your home in retirement" mentality.

Does this work for the risk adverse? Heck no, its even too risky for me. But 40 years of investing has given my dad investment confidence greater than I have after 18 yrs investing at 40 yrs old.

[feh]

+1 to Steve's and Bucky's comments.

Regarding age in bonds - we've always had less than that percentage, because I'm comfortable with a little more risk.

[Retired To Win]

... "Taking profits" wisdom might apply if you are drawing money to live on, but if you are in a stage of life where you re-invest the profits and don't yet need that money to live on, what is the benefit of "taking profits"?...

A taken profit = a realized profit = a REAL profit in your pocket. No profit is real until it IS taken.

(Even if you reinvest that realized profit, you are still helping yourself by having boosted the book value of your portfolio.)

[Nika]

A taken profit = a realized profit = a REAL profit in your pocket. No profit is real until it IS taken.

(Even if you reinvest that realized profit, you are still helping yourself by having boosted the book value of your portfolio.)

If you re-invest it is no longer in your pocket and "real" and is at risk again.
You assign an arbitrary starting point at the time you enter the market and think of it as benchmark. But it is not an actual benchmark. Someone could have just sold that stock at 40% profit at that exact point where you just bought it. Level of risk in investing into a new stock is not any less than leaving it in the old one.