Stocks have been on a tear since March. Some investors have seen their holdings gain 40% or more in less than six months, leading them to wonder if markets are overbought and due for a correction. This,inturn,leads them to wonder if they should take profits and buy back during the dip — or otherwisedo some opportunistic rebalancing away from stocks toward cash and bonds.
I would think longer term. There will invariably be a reversal at some point. But we have just been through a substantial recession and the central banks are now goosing the money supply big time. Historically, this kind of scenario spawns an extended multi-year appreciation in stocks, characterized by higher highs and higher lows. Your best bet will likely be to sit tight and ride the longer swing.
Excessive trading of peaks/valleys or rebalancing of holdings raises costs that eat into returns over the long run. There is also the issue of market timing. Its very hard to sell near the peak and buy back in at the bottom of short-term fluctuations the end result will likely be a lower return than simply holding.
Rebalancing, of course, has its place. Many investors do it annually and this would make sense for those concerned about maintaining a risk level they are comfortable with. However, those with high risk tolerance might not worry about annual rebalancing for two or three years in the current environment.
They could in time become concerned about the bull market ending. In that case, they may consider techniques such as risk budgeting, as Mark Yamada of P?R Investing Inc. epsouses. Or simply begin a regular annual rebalancing.
Index-fund pioneer John Bogle has said he doesnt think rebalancing is necessary at all. If one is a true believer in the thesis that stocks return 7% to 9% annually over 15- to 30-year periods, then all that volatility along the way does not need to be hedged away with rebalancing.
Blogs & Comment
Take your profits now?
By Larry MacDonald
Stocks have been on a tear since March. Some investors have seen their holdings gain 40% or more in less than six months, leading them to wonder if markets are overbought and due for a correction. This,inturn,leads them to wonder if they should take profits and buy back during the dip — or otherwisedo some opportunistic rebalancing away from stocks toward cash and bonds.
I would think longer term. There will invariably be a reversal at some point. But we have just been through a substantial recession and the central banks are now goosing the money supply big time. Historically, this kind of scenario spawns an extended multi-year appreciation in stocks, characterized by higher highs and higher lows. Your best bet will likely be to sit tight and ride the longer swing.
Excessive trading of peaks/valleys or rebalancing of holdings raises costs that eat into returns over the long run. There is also the issue of market timing. Its very hard to sell near the peak and buy back in at the bottom of short-term fluctuations the end result will likely be a lower return than simply holding.
Rebalancing, of course, has its place. Many investors do it annually and this would make sense for those concerned about maintaining a risk level they are comfortable with. However, those with high risk tolerance might not worry about annual rebalancing for two or three years in the current environment.
They could in time become concerned about the bull market ending. In that case, they may consider techniques such as risk budgeting, as Mark Yamada of P?R Investing Inc. epsouses. Or simply begin a regular annual rebalancing.
Index-fund pioneer John Bogle has said he doesnt think rebalancing is necessary at all. If one is a true believer in the thesis that stocks return 7% to 9% annually over 15- to 30-year periods, then all that volatility along the way does not need to be hedged away with rebalancing.