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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One of the biggest frustrations for investors is that there is one huge factor no one can control—the returns that the financial markets are going to provide in any given stretch of time.
When we first start investing, we probably ought to receive the serenity prayer* along with the prospectus for whatever fund or security we’re purchasing.
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You’ve heard it before: Stay the course. Don’t sell when your assets are valued at the lowest point.
Is this “do nothing” message always correct? Could it lull you into making a bad decision?
The idea of not making any market moves is based on the assumption that before the bear market started and the recession kicked in, you were rational and had put together a balanced portfolio—diversifying your risks and reflecting your risk tolerance.
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Universal lessons are just that—they apply to everyone, or almost everyone. Sometimes, though, even the most knowledgeable people stray from what they know to be the better decision.
For example, asset allocation is critical, and rebalancing should be done periodically—particularly if your portfolio is more than 5% out of balance. At Vanguard, we promote these practices quite regularly. They’re good practices that disciplined investors should—and do—incorporate into their investing decisions.
What’s surprising (though maybe it shouldn’t be) is that, as a January Wall Street Journal article by Jason Zweig explains (subscription required), even some of the most well-known mavens of the investment world digress from their own investment philosophies.
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