For investors who want to do something to make money but don't have the confidence to throw more cash into the market, one option is to simply rebalance their portfolio.
For investors who want to do something to make money but don’t have the confidence to throw more cash into the market, one option is to simply rebalance their portfolio. Though normally this means reallocating the stock and bond proportions of a portfolio when one gets out of whack compared to the holders’ original intent, rebalancing can apply to different class assets of stocks: for example U.S. vs. international. This technique is so important that target date funds do so automatically, as well as some brokerage firms.
This method works especially well during periods of high volatility and when assets in a portfolio do not correlate — meaning they move in different directions during similar market conditions. Typically U.S. and international stocks have not been in sync just like stocks and bonds, though this is becoming less true since the world is now so connected.
Nevertheless, what happened to the U.S. and international markets since 2000 is a vivid demonstration of why rebalancing different stock assets periodically or when one is out of balance can be helpful.
Both the Vanguard Total International mutual fund (representing the broad international market) and the Vanguard Total Stock Market Index (representing the broad U.S. market) have made little forward progress between the years from 2000 and 2012. They both sit more or less where they were at the turn of this century. In 2000, the former was about 14 and today it is essentially the same net asset value.
Likewise, the Vanguard Total Stock Market index barely nudged above 35, where it started in 2000.
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There is a difference between the two though. The international market went for a sprint above its 2000 starting level of 14 in 2006 and reached its peak above 20 late in 2008. This means that rebalancing between the U.S. and international — either at this point or regularly before (normally no more than once per year) — could have been beneficial for the investor. She would have cashed out of a relative winner and placed that money elsewhere in her portfolio where it was needed to bring her target portfolio levels back to her original goal.
I wrote about a successful model portfolio and the concept of asset allocation in previous columns as well as market motion, now known to be even more important for portfolio success than asset allocation.
I do have a word of caution here. The same logic may not apply to a mix of stocks and bonds instead of one stock asset class compared to another which I used to illustrate in my example.
According to Jason Zweig, during disaster investing periods — think the Great Depression and the last 15 years — a rebalance of stocks and bonds in a portfolio can lead to worse results during certain times. Therefore, he recommends it only for younger investors and even then weakly.
My take on his article is that he is reluctant for older investors to do it at all. Keep in mind that Zweig is talking about stocks/bonds, and I am discussing different stock sectors that ideally correlate poorly.
Some people think the market will continue to go up because it has been and investors seem to have lost their fear. They could be right or maybe not.