As published in the Racine Journal Times | March 7, 2013

As stocks continue to increase in value, more people are starting to wonder whether they will continue to rise or whether a decline is coming soon. As the major stock indexes build on their gains from 2012, I think it’s a reasonable question for investors to ask (especially since we haven’t seen a major decline in the Dow Jones Industrial Average in more than nine months).

Unfortunately, anyone attempting to answer the question by peering into their crystal ball for the future is bound to guess incorrectly if they do it long enough. This doesn’t mean you have to be subject to the whims of the market with no control of your financial destiny.

When it comes to investing, there are a number of factors you can control, as well as many you cannot. Knowing the difference is the key to success. One factor to focus on currently is when to rebalance your portfolio.

Rebalancing is the process of selling one type of asset to purchase another on a consistent basis. This is often done in the context of maintaining specific amounts in each asset class. Due to changes in prices and other factors (such as contributions or withdrawals), you can find yourself with completely different allocations to stocks or bonds than you originally started with.

For example, if your target is to have 60 percent in stocks with the remaining 40 percent in bonds, the last couple of years provide an excellent illustration of what can happen if you don’t do any rebalancing. After robust increases in stocks and relatively flat bond performance, your original allocation could easily be approaching 70 percent in stocks.

Assuming there was a good reason for selecting your original allocation target, you could find yourself taking on more risk than you originally intended. Reducing your stock allocation at this time makes sense without the need to predict whether stocks will continue to increase or not.

Interestingly, the strategy of rebalancing is familiar to most people as it represents the old adage of “buy low, sell high.” While it may sound like common sense, too often our emotions prevent us from putting it into common practice. When’s the last time you reviewed your allocation?

Deciding when to rebalance is one of the five key decisions featured in Dan Goldie’s and Gordon Murray’s book, “The Investment Answer,” which outlines other practical ideas for managing investments in fewer than 80 pages.  Copies of the book are available at our office.  FSG also hosts a workshop on the subject.  If you’re interested in attending an upcoming workshop, please let us know!


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