Dare to Rebalance

December 17, 2008
Special Feature

End-of-year portfolio rebalancing, which has become an annual ritual for many savvy investors, may strike fear into the hearts of some this time around.

End-of-year portfolio rebalancing, which has become an annual ritual for many savvy investors, may strike fear into the hearts of some this time around. With stocks in the cellar, many portfolios have become top-heavy with bonds, and rebalancing means leaving that relatively safe haven for the stormy seas of the stock market. The temptation for many investors is to avoid that shift until there’s at least some glimmer of hope that stocks are making a comeback.

It may be a while before that glimmer shows up. In the meantime, say investment gurus, avoiding the shift into stocks negates the purpose of rebalancing, which is to force you to buy assets when they are in the doghouse and therefore cheap. Waiting for an upturn can put a dent in your long-term gains, since you miss out on the chance to buy stocks at a time when they are at a low ebb and poised to deliver better long-term results. You also defeat the other purpose of rebalancing, which is to take the FUD factor—fear, uncertainty, and doubt—out of your asset allocation.

Rebalancing assumes that you have taken the time and effort to set up an appropriate asset allocation strategy for your portfolio. Your asset allocation strategy generally should start by deciding what mix is appropriate for your age; financial planners usually recommend a portfolio that gets tilted toward bonds as you get older. Unfortunately, many older investors who ignored this advice got badly mauled by the bear market. At the beginning of 2007, according to the Employee Benefits Research Institute, two out of five 401(k) participants between the ages of 56 and 65 had 80% or more of their 401(k) assets in stocks.