Several of our clients come from advisors who selected rudimentary mutual funds for their portfolios and rebalanced on a scheduled basis. We highlighted a number of problems with this approach. First of all, many mutual funds charge fees which are deducted from the fund's value. In this case, the clients were paying double fees—one to the mutual fund manager and the other to their former advisor. Some of these fees are called 12b-1 fees, which are charged on top of the management fees and provided to the broker-dealer as sales commissions. These fees add up! Without realizing it, it's far too easy to pay excessive fees for mediocre performance.
Additionally, scheduled rebalances can cause arbitrary asset reallocations. A valuation-based rebalancing approach can be a much more effective strategy. Ultimately, I advise my clients to invest in a bespoke portfolio of individual stocks. As new opportunities arise, we rotate out of mature holdings on a continual basis. This approach is designed to produce superior performance and reduce risk, in line with each client's unique needs.
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