We have no idea why they went to a financial advisor. We hope it was with the intent to try to improve their situation…but it kinda sounds like they found the wrong guy to help with that.

We’ve been hoping for the best for them but they keep giving us more reason to doubt than hope. But here’s to hoping!

Sounds like bad advice, but maybe your husband’s cousin was hell-bent on having an SUV? Something doesn’t add up with the story.

Why did they go to a financial planner to begin with? To find out if they could afford a huge, expensive SUV with crap income?

My husband’s cousin and her husband just bought a brand new Chevy Durango (on a loan) off the lot because their “financial advisor” told them it would be a good idea…to prepare for their future family.

They: are brand new marrieds, less than six months; don’t have a college degree between them; are not currently attending any kind of job/skills training programs; both have to travel 20 miles each way to work each day (high fuel costs + SUV = yikes!) for customer service jobs; already have other sources of consumer debt; are not even planning on starting a family for a while yet to come.

Am I missing something, or does this seem like pretty crappy advice?

His logic is this: The purpose of a diversified asset allocation is to allow assets that move differently from each other to do just that, move differently. Rebalancing is the “idiot-proof” way of selling high and buying low. However, one year to the next, an asset is likely to repeat its performance. Over two or more years, it is unlikely to repeat its performance. Therefore he concludes that reallocating more frequently than every two years reduces the likelihood of selling after a run-up and buying in a trough.

All that said, I agree with Edelman’s advice (as you present it). Despite many trusted sources asserting that market timing is a fools errand, I can’t help but think that if you are following an investment schedule, either putting money into an asset, taking it out, or rebalancing among or between assets, you can “time” your action to market behavior within your allowed period. That is, if your plan calls for a rebalancing in a six month window, you can watch for a precipitous drop in the asset class you intend to buy or a run-up in an asset you intend to sell.

I only read Four Pillars very recently and have been rebalancing more or less quarterly, but I’m going to knock that off! Now I have to do at least one re-allocation, now that I’ve read his book (and bought his story), but that’s different than rebalancing.

The reality is frequent rebalancing can hurt your performance due to the tax ramifications and transaction costs.

Using the small cap example, you may find yourself rebalancing five or six times a year if you try to keep a 10% allocation, especially if you rebalance if the allocation moves to 8% or 12%. Just look at this year. The markets went down 6% in August, then rose until November, then went down another 8%, and are up 5% again. The markets trade within ranges for most of the year. This will result in numerous trades for very small fluctuations.

I only rebalance either annually or if an asset class deviates by more than 5% of the portfolio. So if my small cap exposure should be 10% and it jumps to 15%, I will look to rebalance. I still might not if I am looking at a short term capital gain. Also, if I am doing an annual reblance and my 10% allocation to small cap is currently 11%, I won’t rebalance. It isn’t worth the trading costs and tax consequences.