George Fisher Advisors LLC

Portfolio Management

The Investment Planning section examines the concept of value investing and stresses the three main components of my investment philosophy:

Avoid any reliance on the financial services industry

Always focus on producing reliable cash flow

Broad diversification is critically important to long term success

This section introduces the vital but often misunderstood topic of portfolio rebalancing. To start, take a look at the two charts below.

Let’s assume the chart at top left represents an investor’s portfolio at the beginning of a given period. The asset classes are quite normal and the weightings realistic. Let’s also assume that the chart at bottom left represents the same portfolio exactly twelve months later.

Clearly, the asset allocations have altered during the year in review: equities have grown from 40% to 55%, while the cash and bonds have diminished. This doesn’t necessarily imply that the portfolio has increased in value; it’s quite reasonable to assume that it may have decreased. But the essential point is that the asset classes no longer have the same weightings they had at the start of the year. Put another way, the portfolio is riskier now than it was twelve months ago.

At this point, according to conventional wisdom, it is time to rebalance the portfolio. One way would be to liquidate some of the equities and re-invest the funds in cash and bonds. Another way would be to increase the cash and bonds holdings by injecting fresh capital into the portfolio.

But is this really the correct thing to do? Very often, the answer is no. Several factors support this assertion, but one of the most compelling is that the long term costs of frequent or continual rebalancing can actually outweigh the benefits.

The Costs of Portfolio Management

The financial services industry’s primary purpose is to generate fees; an investor’s primary focus must be to eliminate them. Costs eat up an average of 50% of an investor’s returns ... for absolutely nothing.

If this statement seems unrealistic, it isn’t. Think about it this way: if compound interest can be considered the eighth wonder of the world, failing to anticipate the costs of investment management can be thought of as the eighth deadly sin.

More than anything else, my job is protect your assets. I help in other ways, too. But reducing costs is a fundamental part of an effective, long term investment strategy.