Timeless Words to Invest By

William Bernstein's The Intelligent Asset Allocator is growing into a classic of the genre. It offers far more than hard evidence that smart diversification and rebalancing ar e the ways to enhance your lifetime wealth. It also says what you're up against -- yourself -- and helps readers gain conviction in the discipline of asset allocation:

• An important assumption underlies all of the portfolio discussions thus far: that at the end of each year the investor rebalances the portfolio back to the target compositions [% U.S. equities, % treasuries, etc]. If a particular asset has done extraordinarily well, its portfolio weighting will increase; consequently, enough of it must be sold and reinvested in the poorly performing assets, to return to the target composition. This target composition is often referred to as the "policy allocation." You cannot underestimate the amount of discipline and patience required for this process, because it means doing exactly the opposite of what most of the investment world, almost all of whom are professionals and experts, is doing. A psychologist friend points out that this is an effective way of becoming a "contrarian," always moving in the opposite direction of the crowd. You will of necessity be selling what everybody loves and buying what they hate. You have only to remember that the great buying opportunities in U.S. stocks in 1974 and Japanese stocks in 1970, to name a few, followed several years of grinding bear markets. But be forewarned: investment during market bottoms has the distinct feel of throwing money down a rat hole.

We strive to asset allocate decisively instead of programmatically; meaning, we want to make judgements about how and when to rebalance toward the weakened performers. We'll be comparing our performance to a programmatic rebalance, and to other "classic" asset allocations. Berstein's book is a treasure trove for us in this endeavor, and for all kinds of investors.