REBALANCING INTO EMERGING MARKET STOCKS: SOMETIMES IT DOES MAKE SENSE TO RUN, OR AT LEAST STROLL, INTO A BURNING BUILDING

8/22/13

So far this year, the S&P 500 index is up 15%.   The MSCI emerging market index, on the other hand, is down 12%.   So one would think this would be a good time to be putting money into the emerging markets…buy low, sell high…, right?   Apparently, most people don’t think so; individual investors have been pulling money out of emerging market stocks and stock funds for just about the whole year and the pace of selling has picked up this summer.

It’s hard to blame people for getting out of emerging markets in the wake of those markets’ miserable performance this year.   It’s human nature to get out of seemingly dangerous situations.   Even though it’s logical to buy stocks, or at least broad indices of stocks, when they are down, our instincts tell us otherwise.  It takes a lot of courage, or some might say at the time of the trade, foolhardiness, to do what an investor ought to do:   effectively buy low and sell high.

Since most of us don’t have the courage to sell heretofore rising markets and buy heretofore falling markets, it makes sense to substitute discipline for courage.   At the expense of sounding like the proverbial broken record (8/16/13’s post EXOTIC INVESTMENT PRODUCTS FOR THE “AVERAGE GUY”:   WHAT’STHE POINT? is only the latest occasion on which I have made this point.), the best strategy is to rebalance and to do so religiously.   Rebalancing forces us, against our usually poor instincts, to sell a portion of our portfolio high and buy, if you will, a portion of our portfolio low…precisely what the successful investor should do.   Discipline beats courage…and both beat judgment when it comes to markets.

Don’t misunderstand yours truly; I am not saying that you should be putting money into emerging markets because they are down and am certainly not saying that I think emerging markets are going up.  I have no idea where emerging markets are going in the short to intermediate term; hence very little, in either direction, would surprise me.   What I am saying is that if emerging markets are part of your long term asset allocation and you are approaching a rebalance date, or a rebalance bound, disciplined rebalancing in all likelihood dictates moving assets into emerging market stocks since they have been so badly beaten up of late.   Don’t abandon a sound rebalancing strategy out of fear arising from the recent performance of the emerging, or any, for that matter, markets.  The whole point of employing such an approach is to avoid substituting judgment; i.e., idle speculation and emotion, for discipline.

On a related note, it amazes me more and more as I follow the financial media how much time, effort, and brainpower is spent (wasted, really) on idle speculation about where “the markets,” however defined, are going.   As my first boss told me years ago, back when I was much smarter than I am now and therefore didn’t listen as closely as I should have, NO ONE knows where the markets are going.   As with my father, my first boss gets smarter as I get older, and both started out pretty smart in the first place.  Yet some incredibly brilliant people (and, to be fair, some not so brilliant people  (See 8/19/13’s “ADVICE” ON EMERGING MARKETS:  IT MUST HAVE SOUNDED BETTER INA BROADER CONTEXT), spend their careers and lives effectively shooting the breeze over the direction of markets when they must know, or will learn when they get more experience, that they don’t have a clue.   Think of the wasted time.  Think of the wasted talent.  Think of the wasted money that goes toward paying these people to pointlessly pontificate.   And think that it comes largely out of your pocket if you eschew index funds and other low price investment products in favor of tapping Wall Street’s “brains.”