Blogs & Comment

The biggest problem with rebalancing

When stocks were crashing in late 2008 and early 2009, did you rebalance your investments? Did you actually move money out of cash and bonds into stocks?
Many did not. They either froze or dumped stocks in a panic. At least that is the conclusion of a recent study released by two finance professors, Louis H. Ederington and Evgenia V. Golubeva, at the University of Oklahoma.
We find no evidence that mutual fund investors follow the advice of financial advisors to rebalance following large stock or bond price movements to restore their portfolio proportions to pre-existing target levels, conclude Ederington and Golubeva in their March 14, 2010 working paper The Impact of Risk and Return Perceptions on the Portfolio Reallocation Decisions of Mutual Fund Investors.
Yes, investing is simple, but not easy to do. Its indeed hard to fight fear in bear markets and greed in bull markets. Even the best can succumb. Retired Montreal lawyer Marc Ryan has been investing for most of his life and now authors a website for investors, What was his worse investing mistake? It was not rebalancing enough after the stock market had moved up so much in 2007.
There is a debate over how often investors should rebalance. Should they go by some calendar date? Or should they use thresholds that is, only rebalance when asset allocations stray by some amount, often 5 percentage points, from their targets?
The truth is that these considerations matter little compared to whether the investor chooses a rule and sticks to it, writes Michael J. Wiener in his blog, Michael James on Money.
In response to a question about rebalancing, the author of The Only Guide to a Winning Investment Strategy Youll Ever Need, Larry Swedroe, urged investors to think of themselves as postage stamps. The postage stamp does one thing and only thing, but it does it extremely well. It sticks to its letter until it reaches its destination. The job of an investor is to adhere to their plan until they reach their financial goal.