The Natural Antidote for Excess

Related Link » A special report on America's economy: Time to rebalance
“Virtually every industry has shed jobs in the past two years, but those that cater mostly to consumers have suffered most. […] The bubbly asset prices, ever easier credit and cheap oil that fuelled America’s age of consumerism are not about to return. Instead, America’s economy will undergo one of its biggest transformations in decades. This macroeconomic shift from debt and consumption to saving and exports will bring microeconomic changes too: different lifestyles, and different jobs in different places. […] The effect on the economy of deflated assets, tighter credit and costlier energy are already apparent. Fewer people are buying homes, and the ones they buy tend to be smaller and less opulent. […] America’s economic geography will change too. Cheap petrol and ample credit encouraged millions of Americans to flock to southern states and to distant suburbs (“exurbs”) in search of big houses with lots of land. Now the housing bust has tied them to homes they cannot sell. Population growth in the suburbs has slowed. For the present the rise of knowledge-intensive global industries favours centres rich in infrastructure and specialised skills. Some are traditional urban cores such as New York and some are suburban edge cities that offer jobs along with affordable houses and short commutes. […] ‘There’s a world view that the United States is the consumer of the world and emerging markets are the producer’, says Bruce Kasman, chief economist at JPMorgan Chase. ‘That has changed’. He reckons that America will account for just 27% of global consumption this year against emerging markets’ 34%, roughly the reverse of their shares eight years ago. […] America’s imbalances were years in the making and will not be undone overnight. But the elements of a rebalanced economy are already visible …” [emphasis added]
— From The Economist, Mar 31st 2010

"Buy low; sell high". It is the essence of a universal truth: rebalancing is the natural antidote for excess.

Have you noticed the enormous increase in shilling for gold? Perhaps it was a very good move to buy gold — 10 years ago! But why would you think it was a smart move now, when all these people are trying to sell it to you? Buy high; sell low? Seems to be counterintuitive, n'est pas?

I am not an investing wizard. I am, however, a prudent man. I realized a long time ago that I have zero chance to evade the sharks roving the financial markets, whose full-time job is anticipating what amateurs like me are likely to do. My full-time interests lay elsewhere; I just didn't want to get eaten alive by the sharks.

Here's what I know to be true for amateurs like me:

1. asset allocation
2. diversification within asset classes
3. dollar-cost averaging
4. periodic rebalancing

And the simplest way to implement all four precepts is to dollar-cost-average into a balanced mutual fund. Standard disclaimers apply, such as "your mileage may vary".

Oh, yeah, one more thing: avoid debt like the H1N1 virus. That is the smart thing to do. Still.

Post #1,190 The Natural Antidote for Excess