Automate rebalancing to harness clients’ inertia

What’s the right asset allocation for our clients?

It turns out, being consistent is far more important than being right when it comes to asset allocation. Statistically speaking, however, most investors and even investment advisors are anything but consistent.

Let’s face it, selling high quality bonds and buying stocks back on March 9, 2009, when stocks bottomed out, would have required nerves of steel. Though most investors did nothing, many panicked and sold stocks at just the wrong time. To buy stocks back then was to ignore every instinct in our bodies. Lehman Brothers was bankrupt, GM was moving toward bankruptcy, and TARP funds were being used to keep our financial system on life support.

In hindsight, of course, we know the death of capitalism was greatly exaggerated and rebalancing worked as well then as it did in the last half-off stock sale after the internet bubble. But the next plunge will also be different and rebalancing will still be just as hard.

Enter the power of inertia, the most powerful force in the universe according to some. (It is almost certain that Albert Einstein never gave compound interest that title.) Asset allocation funds and target date retirement funds generally do the rebalancing for us and our clients. Examples include Vanguard, Fidelity or T-Rowe Price target date retirement funds.

Advisors also have access to technologies that can automate the rebalancing process. This keeps discipline to a maximum and employs the power of inertia by requiring little or no action.

But overcoming status quo bias is no easy task. The more that we advisors, or our clients directly (through target date funds in their 401k plans), can harness that inertia and have it work for them, the more consistent investment allocation will be. And that consistency has historically led to consistently greater returns.

Allan S. Roth, a Financial Planning contributing writer, is founder of the planning firm Wealth Logic in Colorado Springs, Colo. He also writes the Irrational Investor column for CBS MoneyWatch.com and is an adjunct instructor at the University of Denver.

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