If he wants to actively try a trading system that he thinks works then why not let him? I personally wouldn’t try it because I don’t believe in mutual funds except indexes, but he’s up 30% twice in two years (so almost 70%) which is way better than me. He would have to very unlucky to now lose that much.

I agree. I own an REIT fund, but I don’t think it’s like owning actual real estate since it’s property, property management companies and financing firms that deal mostly in commercial real estate. However, it’s all of the profits and none of the headaches of being a landlord.

As long as commercial properties are doing well, I’m doing well. The REIT fund allows me to be diversified in several metropolitan markets for real estate in a way that I couldn’t do as an individual investor, but it’s not really real estate. It’s a sector specific fund. Those companies could be run into the ground like any other company.

As to the main part of the post, I thought Mr. Updegrave’s inquirer was kind of crazy. Rebalancing to chase returns is nutty. However, I don’t think a person should not chase any returns. I have a good feeling that international markets are going to do well in the next 3 years, so I’m contemplating halting my contributions to one fund to free up assets for an international fund. I think for my time horizon on retirement (30+ years), I can afford to chase some returns early, especially if we’re talking about spectacular returns (20+%) vs more reasonable returns (8-12%). Sure, I risk losing, but I risk losing in ALL mutual funds and investment vehicles, short of US Treasuries. (ick)

FWIW, my 401k account has two really lousy small cap funds (and no mid-cap), but my private IRA has better ones of both, so there is rebalancing one account vs rebalancing my entire portfolio, and chasing returns in the right place.

The problem is likely with the sector funds. It would have led you to invest in XLK or QQQ in 2000 and have of your money would have been gone very quickly.

Let me play a little devil’s advocate here and say that I’m unbalanced towards foreign funds myself and I think it’s been a valid strategy for me.

First off, let me give you some detail about my financial situation.

1. I’m 42 and making 46k a year right now, (not hot but better than national median household income). I’ve been with the same company for over 12 years now to some degree because of the great benefits here. More about that in a sec.

2. I have about 135k equity in my primary residence and 15 year fixed mortgage at 5.49% with 12 years to go on it.

3. The rest of my retirement assets are in a 401k, which is limited to the American Funds family. I’ve accumulated $147k in there to date most of that split pretty evenly between foreign/domestic. There’s very little small cap available in American funds and most of them aren’t so hot according to FundAlarm so I’m pretty heavily large cap.

4. I get very generous matching here (employer matches 100% up to 15% withholding). I’ve been working to withhold that 15% but for now I’ve had to limit that to 10% given my mortgage.

5. I can exchange shares between funds for free and they typically execute those within 24 hours.

Here’s the issue. Right now I am doing exactly what the article is warning against. The bulk of my contributions go into the ICA fund initially. ICA is pretty conservative and the returns reflect this. I had the bulk of my money there during the dot.com crash (thank god) but have been moving out of it every quarter in 5-10k batches into more aggressive funds over the last 3 years or so.

Most of these exchanges went into foreign funds (EuroPacific and New World) over the last 3 years and I’ve obviously been pleased with the performance during that time. I’ve reached nearly 65% foreign to domestic currently. That’s as far as I plan to unbalance things.

Given my long investment horizon and pretty high risk tolerance (i didn’t blink at all during the correction in late February), and given that I can respond pretty quickly to market changes I monitor, why shouldn’t I continue to pursue this strategy?

Is there really a chance that I’m going to be wiped out by a sudden correction in the foreign markets? Don’t mutual funds, particularly huge one like American Funds limit your volatility and give you time to respond to market turn-arounds? After all I can exchange to something less volatile within a day or two.

Am I gambling to some extent by overbalancing to foreign funds? Sure. It’s been working pretty well so far. I’ll be scaling back the other way over the next 6 months most likely, but for now that’s my allocation. Let the scolding begin…

REITs are being touted as a form of real estate ownership. I don’t really understand myself the extent to which an REIT is just another stock/ETF as opposed to being a form of real estate ownership. Seems grey to me.

On another note: sometimes I hear of people doing things like day trading inside their 401(k) or IRA, which also scares the tar out of me.

DB

Personally, I don’t know enough about economics to manage my funds in such a way, so I leave it to the professionals.