During the last bull market, some geographical regions, such as emerging Europe and Russia, accelerated well ahead of the rest, I failed to diligently rebalance and paid the price. I’d have more money to reinvest now if I’d thought about it.

Whilst rebalancing these runaway sectors, I’ll give closer consideration to reducing my whole portfolio, maintaining the target allocation of course. Liberating cash in this way is something large fund managers can rarely do, so I intend to use this advantage next time round.

Clearly, not all corrections are going to be as drastic as the Credit Crisis, but for those lesser moves I’d aim to stay fully invested. None the less, rebalancing out performing investments and holding back new cash may be appropriate.

I hope that reducing holdings, along with the stockpiling of new cash, will enable me to capitalise on future bear markets.

I recently heard the founder of CMC Markets commenting, and I paraphrase, that traders call a bad trade an investment. At the heights of the last bull market, when M&A action was all that was sustaining prices, I have to admit that I nearly fell into this trap.

Whilst I feel that I’m confessing a sin: admitting to buying on market rumours, I avoided compounding the error by convincing myself that the stock would still be good value for the long term. It wouldn’t, the price was inflated, the fundamentals I ignored made that clear, and it was very unlikely to ever be worth what I paid for it.

Trading and investing are not the same thing, and require different strategies. Timing is important for a trade, as is close observation and the use of stop losses. An investment must represent reasonable fundamental value to be worth buying, so the precise dynamic of the current market doesn’t matter as much.

In future I’ll decide, in advance, whether I’m trading or investing.

This combination sounds a little contradictory, since asset allocation is the response to the perceived impossibility of deciding on price in a random walk down Wall Street: you can’t consistently outperform the market.

Whilst I don’t entirely subscribe to this sentiment, I believe it has good applications at the core of a portfolio comprised of these asset classes.

• Equity based mutual funds, diversified both by size and geographic region.
• Commodities based on ETCs.
• Geographically diverse corporate and government debt.
• Mutual funds directly invested in commercial property. If asset diversity is the goal, investing in property stocks doesn’t really cut it, they’re still equities.

This core represents about 80% of my portfolio, and I use fundamental analysis, alongside the actual asset distribution, as a method of timing my rebalancing and adding cash into the portfolio.

Fundamentals are key to actively managing the remaining 20% of my portfolio, which is mostly invested in UK equities, in the form of individual company stock, and both long and short index tracking ETFs.

This strategy remains unaffected by the Credit Crisis, but my execution has changed in two main respects; being honest with myself about objectives, and active use of cash within the portfolio. These will be the subjects for a couple of future posts.