“If a stock [I own] goes down 50%, I’d look forward to it. In fact, I would offer you a significant sum of money if you could give me the opportunity for all of my stocks to go down 50% over the next month.”

     ~Warren Buffet, speaking at the Berkshire Hathaway annual conference

I used to read a quote like this and quickly decide that because I’m not Warren Buffet, it doesn’t apply to me. I’m glad I know now that nothing could be further from the truth!

Let me start by saying that if you have money in the stock market and you need to spend this money in the near term (3 years, plus or minus), then you should either get it out or reduce the stock exposure in your portfolio by diversifying with a greater amount of short-term fixed-income products. The degree to which you do this depends on how much you need and how soon you need it. Feel free to call and talk to me any time about this if you are unsure about your positions. This is not a panic plea, just a reminder that if, like me, you got a little older last year, make sure your portfolio didn’t get younger in the mean time.

One of my goals as a coach to investors is that my clients would get a bit excited—like Warren Buffet does—when the stocks they own go down in value. I know this sounds a little loopy, but it makes too much sense to ignore, especially these days when we are being sold a bill of bear-market goods: if we don’t borrow more money or raise our taxes, the bottom will fall out . . . of everything!

We’re all a little edgy about the stock market. So today’s post is meant to bolster you a little and prepare you for whatever may be coming next.

Believe this:

Warren Buffet is just like the rest of us. He holds large positions in equities like we do, and because of market fluctuations, his net worth declines along with the market some years. Yet it is also true that Warren Buffet makes positive strides in his portfolio EVERY YEAR, just like my clients do—so long as they behave in a disciplined manner. Let me explain.

First, it requires that you are invested into diverse asset classes.

This means that the different funds you own comprise different types of assets, assets that act dissimilarly to one another. This is true of my clients, who own an engineered fund composed of over 15 of the most beneficial distinct asset classes representing over 12,000 separate companies in over 44 free-market-economy countries. This is true diversification.

Beware! Most “diversification” is a Farce! So often (this has happened hundreds of times) I’ll analyze a new client’s old portfolio and find 4 or 5 mutual funds. But when I open them up, I find that, by and large, these 4 or 5 funds own the same companies inside them. This is so detrimental!

First, the investors think they’re diversified. They must, or they would not have chosen four or five different funds.

Second, it provides no opportunity for positive return in down times. When one of the funds is down, all of them head down every time.

Third, it provides no opportunity to rebalance. Rebalancing is necessary and beneficial when one of the fund classes goes up and another goes down. We sell shares from the one that has risen and purchase shares of the declining asset class. This ensures that we’re constantly buying low and selling high. When an entire portfolio moves in the same direction, this is impossible.

Next, we wait for a decline of one of the asset classes.

Tom Petty had it right—the waiting is the hardest part. In fact, when equities are up 3 years out of four, seeing one or two asset classes go down at the same time does not happen all that often. But when it does, hold on—this is when it gets fun.

Finally, we take decisive action.

Once we notice that Large International Value Company’s prices, for example, have declined more than say International Small Company stock prices or Five-Year Government Bonds (which have likely risen), then we buy and sell. We sell shares of the class that is over-weighted or where the price/value is higher relative to the other classes we own, and we purchase the relatively lower priced classes.

This is making positive strides in a down market. We are piling up shares of Large International Value Company Stocks while we can buy them for less. We know at some point they will rebound as an asset class, and when they do we’ll have more shares

We do this consistently and predictably. We’re always re-balancing.

So if you’re staying disciplined, you can and should be making positive strides in your retirement portfolio EVERY YEAR.

You can and should LOVE THE BEAR MARKET.

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