It’s Not A Bad Time To Rebalance

Maybe you don’t like a lot of fuss as an investor, and you want to buy-and-hold a simple portfolio for the long term. That’s fine, but you do have to rebalance periodically. And people who favor simplicity may do that rebalancing on a pre-set schedule – quarterly, semi-annually, or annually.

But if you want to be a little more active regarding your rebalancing, now’s not a bad time to consider doing it. Here are some asset class returns for the year through January 30, 2019:

You can see that stocks have done well, with the S&P 500 Index surging by around 8%. Small cap stocks have done even better, with the Russell 2000 Index rising more than 11%. Emerging markets stocks have bounced back too from a poor showing in 2018 with an 8.67% return for the first month of this year. And finally, with interest rates seemingly under control, REITs have topped the list with a gaudy 11.78% return.

If you started the year with a balanced portfolio of, say, $100,000, the $60,000 you had in stocks could now well be over $63,000. The $40,000 you had in bonds, by contrast, might not even be at $40,500 at this point. It’s not necessary to rebalance, but if you have a tax-advantaged account like a 401(k) or an IRA, and you can switch funds without paying fees or commissions, it’s not a bad idea. If your $100,000 is now close to $104,000 because of the $3000 you’ve made in stocks and a few hundred dollars in bonds, go ahead and move around $1,000 from stocks to bonds. That will get your stock exposure back to 60%.

That’s not a huge move, but the great investor, Benjamin Graham, who understood investor psychology before behavioral finance became an academic discipline, knew that investors get antsy to do something. And if fees, commissions, or taxes aren’t an issue, rebalancing is a good way to satisfy that itch to trade without doing yourself harm.

Besides satisfying the desire for activity, rebalancing can help you in other psychological ways. If you rebalance, and the market drops, you can feel happy that you took at least some money off the table – even if it was only a small amount. If, on the other hand, the market goes up, you can be satisfied that you didn’t alter your target (60/40) allocation; you just returned your portfolio to it after the January gains altered it, booking some profits in the process. You still have 60% of your money working in stocks.

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