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September 07, 2007


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Rebalancing is important even if you are in an all stock portfolio. Even within stocks, correlations differ. For instance, large cap U.S. stocks have a low correlation with international small cap. Even within the U.S., small, mid, large and micro cap stocks do not move together in lock step. And then there are differences between growth and value stocks.

By rebalancing, you create a systematic process to take advantage of these independent movements. If small cap value is trouncing large cap growth, which has been the case for the past four years, then you will be selling small value and buying large growth...selling high, buying low. Rebalancing, even for all equtiy portfolios, has shown to increase returns while keeping your portfolio risk constant.

Of course, I like to see younger investors who are able to handle all stock portfolios add other equity asset classes to their portfolio like REITs and commodities. These assets have an even lower correlation to stocks.

I believe that index funds serve as a good tool to use for some of a mutual fund portfolio, but I like to try to have some other funds who have consistently outperformed the overall averages as well. I know that index funds beat most mutual funds, but some funds do consistently outpace the major averages.

Aaron --

If you have a list of mutual funds that will consistently outperform index funds in the future (not in the past), I'd love to see a list of them. ;-)

Search Google for 'lazy portfolio' to find suggested index fund portfolios.

Try this link:

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