Some Reminders on Rebalancing

A recent CNN Money article reminds us of the benefits of rebalancing our investments regularly:

The major benefit of rebalancing is that is that it prevents the risk profile of your portfolio from getting out of whack. But it also it forces us to do what we know we should do but rarely do on our own: buy low and sell high. By rebalancing, you sell a portion of assets that have been on a roll (and therefore are more likely to be overvalued or approaching that status) and plow the proceeds into assets that have been lagging (which are more likely to be undervalued or approaching bargain territory).

But you don’t engage in a guessing game like market timers do. You do it in a systematic, disciplined way, within the limits of the asset allocation you set. But you do benefit from lightening up on assets when their valuations are more likely to be gaseous (as stocks were in the late ‘90s) and putting more money into assets that are more likely to be poised for bigger gains (as bonds were when the ‘90s party ended).

My portfolio is currently in a state of flux as I work at selling old mutual funds with high capital gains in favor of an index-only investment plan in a few funds -- so my rebalancing is quite regular. I'm set here, but I thought the quotes above served as a good reminder for us all on the importance of rebalancing.

By the way, for those of you wondering what's going on with my investments (why I have so many funds and so on), check out where I stood in 2005 as well as what I'm doing to reduce my number of accounts while avoiding as much capital gains taxes as possible.

And for more on investment rebalancing, check out these posts:

• Rebalance Accounts Regularly

• Portfolio Rebalancing Boosts Returns

• What is Investment Rebalancing and Why You Need to Do It

Comments

["Mo" Money]

Rebalancing in any portfoilio is necessary especially if it is diversified. Since all funds do not grow or lose the same percentage, rebalancing it the action to take periodically.

[Dave]

This comment has less to do about rebalancing (although I agree that investors should do it early and often). A couple months back I wrote on this website that I thought the market would be heading for another crash in 6-8 weeks. Today, that day arrived. We'll have to wait and look for confirmation tomorrow but I think the odds are very likely that we're headed for another significant breakdown of the markets in the near term.

For long term investors, this is news to rejoice, since they will now be able to buy shares at progressively less expensive prices (i.e., dollar cost averaging). For short and intermediate term bulls, however, this is grim news indeed. If you are a short or intermediate term investor, the best place to be right now is either cash or in short positions.