Given all the market volatility, a lot of folks are wondering about whether now might be the right time to rebalance their portfolio.
Vanguard researchers present an in-depth discussion of rebalancing in this paper. This analysis emphasizes that historically, rebalancing once or twice a year—and only doing so when a portfolio had wandered from its asset-allocation target by at least 5%—produced absolute return/risk results quite close to those resulting from more frequent, complicated, and time-consuming rebalancing efforts. The “take away” is that when it comes to rebalancing, doing it once or twice a year can be useful—and for many investors, there’s little point in making it more complicated than that.
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I’ve been investing in stocks through mutual funds for more than 30 years. I’ve known all along that periodic swoons come with the territory. I’ve experienced the October 1987 crash, the 2000–2002 bursting of the tech-stock bubble, and the kerflop of stocks accompanying the 2007–2009 credit crisis and “Great Recession.”
Even so, it’s never easy to see a fall in stocks slice into one’s retirement portfolio. But if getting older has an upside, it’s that experience has taught me some coping mechanisms.
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You probably know that Vanguard advocates periodic rebalancing as a way to manage risk in investment portfolios.
Our Investment Counseling & Research Group, overseen by my fellow blogger John Ameriks, has written a detailed white paper on rebalancing. John weighed in as part of a post discussing whether buy-and-hold investing is a dead idea. And we’ve written numerous other articles and blog posts on the topic of rebalancing.
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Of all the generally accepted investment concepts called into question by the recent market environment, it seems to me that rebalancing is pretty close to the top of the list.
During late 2008 and early 2009, rebalancing your portfolio to stay close to your asset allocation target would have been almost a daily ritual—and one that would have felt increasingly futile. Even if you’d stuck to an annual approach, closing the gap between your actual asset allocation and your target would have required strong nerves.
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From the Wall Street Journal (subscription required) to the cartoon people interviewed on TV with zippy music, a recent theme in the financial press is that it’s “madness” to build a portfolio using the traditional method of setting an asset allocation and sticking with that strategy through market choppiness. No, these experts say, the market crisis proves you need to day-trade your way to investment success.
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