Today I invested new capital in ten new holdings and moved our portfolio closer to its target allocation. With broad market indexes near record-high levels I struggled to overcome my cognitive bias to buy low and sell high. After acknowledging my bias I made compromise which allowed me to put new money to work without reservations. If you ever find your portfolio seriously unbalanced, this helpful trick may be helpful.
First, context: two months ago, I assumed control of our sprawling family portfolio that generated far more income than necessary and presented several opportunities to offset capital gains and losses. Though much progress has been made, when the day began, our cash position represented more than 25% of the portfolio’s assets.
Today, as I worked to achieve our target cash position (15% of investable assets), I faced a conflicting, and potentially detrimental, urge to time the market (employ capital at the most opportune time). The next market crash may begin tomorrow- in this scenario my family would benefit by waiting to invest after the next market downturn. But the market is just as likely to rise beyond current records and never again, even after subsequent declines, present an entry point this attractive – in this case we would forgo significant returns while waiting for stocks to fall.
I cannot predict future market performance, and I do not have much confidence in the predictions of others. Were the market less richly-valued I would not hesitate to invest all excess cash, but today I decided to split the difference. While current market levels give me pause, I have no reservations about investing half of our excess cash today and holding the residual to invest six months from now (an admittedly arbitrary timeframe, but no worse than any alternative).
The businesses in which I have invested today are exceptionally well-run organizations, and my intention is to own these companies forever. In six months when I add to these positions and assume exposure to their full target weight. See the below chart. For example, to diversify our cost basis in Carter's, Inc. I invested 62.5 basis points (.625%) of the portfolio's assets in CRI today, and I plan to add to the position in six months.
Some of the above stocks may decline 10%, or more, over the next six months and others may appreciate 10%; by assuming a half-position in each holding today, systematically timed the market and diversified our cost basis. Thus my reservations about rebalancing the portfolio to new target weights while the market nears record levels were mitigated. Ultimately, I know compounding returns will be responsible for our portfolio's performance and I cannot predict future market fluctuations; therefore our success as investors will be directly related to the length of time our assets are exposed to the market.
You may experience similar reservations when rebalancing a portfolio during similar market conditions. Or, you may have a stock on your watchlist that seems perpetually overvalued. Split the difference and diversify your cost basis. You will feel less anxiety about your decision and reduce the impact emotions have on your investments.