Investment: Avoiding the Sirens’ call

How disciplined rebalancing keeps your investments off the rocks

In Greek mythology the Sirens lured sailors with their enchanting music and voices to shipwrecks on the rocky coast of their island. The hero Odysseus survived the Sirens’ call by getting his sailors to plug their ears with beeswax and tie him to the mast.

Evolution has left humans poorly wired to resist the Siren call of the markets to dash our investment dreams on the rocks.

Our emotions are powerful forces that can cause us to buy high and sell low, which is exactly the opposite of what we should do. If this is repeated over a long period of time, it will cause serious damage to our investments and more importantly our financial dreams.

To avoid this fate we need to use similar tactics to Odysseus.

The first and most important tactic is to ignore the news (which these days is more about entertainment than information) and resist the urge to keep checking our investments. This can be bad for our wealth.

But ignoring our investments forever is not a good idea either for two reasons:

The first is emotional. Eventually the urge to “do something” and “take control” can become too great. Inevitably this will be at the wrong time.

The second is that over time if left unchecked the Growth Assets in the investment will grow faster than your Defensive Assets. So the investment will eventually become more risky than is comfortable.

The answer is to agree when to rebalance the investment back to the target investment mix beforehand. Rebalancing whenever the investment strays too far away from the target mix enforces a systematic ‘buy low, sell high’ discipline which enhances the long-term return of the investment.

By lashing ourselves to the rebalancing mast we can stay disciplined and avoid the financial rocks.