A.I.M. Users Bulletin Board

[ls7550]

RE: Behaviour, rebalancing, tax and cost efficiencies

Investors and advisors, who regularly face an onslaught of competing claims about how to achieve outperformance, have four bona fide ways to enhance returns, including behaving properly in adverse market conditions, being tax savvy, keeping costs low and rebalancing,

http://www.etf.com/sections/features/21064-buckley-4-ways-advisors-control-alpha.html?fullart=1&start=2

Breaking each of the elements down, Buckley said being a “great behavioral coach” is probably worth 150 basis points of excess return each year. The Vanguard executive was referring to disciplines such as keeping invested when markets turn lower and continuing to put money into the market.

He estimated that being tax savvy might be worth another 60 basis points a year, while keeping costs low and rebalancing are worth 50 basis points and 40 basis points a year, respectively. Again, the four practices are worth an estimated 300 basis points a year—not a trivial amount over the arc of time.

My highlights.

With AIM taking care of behaviour and rebalancing. Its up to you to invest tax and cost efficiently.

Whilst many investors anticipate that they'll behave correctly - often when the crunch comes they'll do the complete opposite (sell after stocks are down instead of increasing stocks. Not reduce (profit take) when prices are high - due to greed of expectation of further gains to come).

Rebalancing and behaviour go hand-in-hand and the above article estimates that adds near 2% yearly to gains. I've seen many instances where investors behave badly - doing the complete opposite to the right thing - amounting to a 2% cost (they lag the market by 2% due to not having added when low, reduced when high and/or rebalanced at appropriate times).

Clive