There are these automatic portfolio management systems. They operate with the precision of a Swiss watchmaker.

How it works.

You start with a certain portfolio that is established according to a standard investment mix. This mix could be in line with you personal preferences; let's say that 80% of the portfolio is to be invested in stocks and 20% is to be kept liquid.

Than according to new savings you can feed the automatic portfolio management system and the money is invested according to the mix. Entering $ 1000,- will end up as $ 800,- converted to stock and 200 dollar on your current (investment) account.

Now, the stock exchange is dynamic and the day-to-day changes will vary. On a periodic basis however, your portfolio distribution is calculated and balanced against the standard mix you started with.

Now if stock prices rise, your portfolio will be out of balance. Reckon that you started with 8000 dollar in stocks and 2000 dollars cash. If the value of the stock in portfolio climbed to lets say 9000, the new distribution of stock will be outside the 80% level (nearly 82%).

So the automatic portfolio

system, will sell the extra percentage of stock in order to rebalance the portfolio. To keep it in line with what you want!

This is a very rational system. Just doing the right thing. Something that is very hard for people that - like most of us - have a unequal judgment about the stock market; if the market climbs we are prone to take more risk. But we are just fooling ourselves.

Once you have questioned your risk-return profile, you will be challenged to stick to the profile. And that's not easy.

© 2006 Hans Bool

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