Your investments: Rebalancing your portfolio

Don’t outsmart yourself

March 25, 2015 22:28
4 minute read.
Investment graph

Investment graph. (photo credit: INGIMAGE / ASAP)


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 “Once you agree upon the price you and your family must pay for success, it enables you to ignore the minor hurts, the oppo - nent’s pressure, and the temporary failures.”– Vince Lombardi

One of the trickiest aspects to long-term investing is when it comes to rebalancing your portfolio. I often see investors who have a hard time effectively rebal - ance because they think they can outsmart the market.

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What does it mean to rebalance a portfolio? The point of rebalancing is to realign the weightings of one’s portfo - lio of assets. Rebalancing involves periodically buying or selling assets in your portfolio to maintain your original desired level of asset allocation.

In time periods when stock returns are much higher, many investors can find themselves with portfolios much more heavily tilted toward stocks then when they started out. Conversely, if bond returns outpace stock returns by enough of a margin, your portfolio could become more bond heavy, or conservative. The point is that by just sit - ting and doing nothing, your portfolio can change into something that you don’t want it to be.

Keep in mind that there are many studies that point to the benefit for investors in reducing their portfolios’ long- term volatility by scaling back on asset classes that have stellar gains and adding to the losing ones.

Buy low, sell high
Rebalancing also has another benefit. It forces you to do something investors all say they want to do but rarely have the discipline to pull off: sell high and buy low. Rebalanc - ing is not just between stocks and bonds; it can be done within the equity portion of a portfolio as well. As the S&P 500 continues on its almost daily march to new highs, it’s not easy for investors to downsize their US holdings and buy more international stocks. After all, international stocks have stunk up the joint over the last three years, woefully underperforming their US counterparts.

Christine Benz of Morningstar hits the nail on the head when she writes: “Rebalancing can be psychologically difficult.


It seems counterintuitive to trim the best-performing securities in a portfolio; one might logically assume that they’ve got the right stuff and will keep on winning. Moreover, the winners in a portfolio often appear to have a macroeconomic tailwind.

Just think of US stocks right now. The US economy has been steadily improving and shows no imminent signs of slowing down, so trimming them might look like a sucker’s bet.”

Investors shouldn’t forget that nothing goes up in a straight line forever, and they should start thinking about investing in markets that may provide more value. It’s also important to remember that when looking at year-by-year return of key market indices, it’s very rare that one specific asset (for example, US large cap) will keep providing the highest returns; usually asset-class returns are cyclical.

Tiger’s roar
For investors with a longer-term horizon, the Far East is where it’s at. As I write in my book Retirement GPS: How to Navigate Your Way to A Secure Financial Future with Global Investing : “The OECD reports that over the next 20 years the middle class in North America is set to drop by both numbers of people and as a percent of the global middle class. The situ - ation in Europe is much worse; its share of global middle class is expected to drop from 36% in 2009 to just 14% in 2030.

Contrast that to Asia and the rest of the world, where you see explosive growth in the middle class, and you can clearly see that most of us will be living part of our retirement years during a major economic leadership change.”

According to J.P. Morgan Asset Management: “Looking at history as a guide, evidence is compelling that an investment into AsiaPacific at current valuations is merited. Asia’s valu - ations are at a significant discount relative to the developed world and relative to history.”

I am usually not a huge believer in trying to time markets, but international and especially Asian markets are cheap relative to the US, and with the longer-term economic trends firmly at play, it’s a potentially good time to invest. Investors need to do their own research to make sure this type of invest - ment fits their risk profile.

Don’t be afraid. For those needing a portfolio rebalance, it makes sense to lower US equity exposure and add interna - tional stocks as dictated by your asset allocation.

The information contained in this article reflects the opinion of the author and not necessarily the opinion of Portfolio Resources Group, Inc., or its affiliates. Aaron Katsman is a licensed financial professional in Israel and the United States who helps people with US investment accounts.

He is the author of the book Retirement GPS: How to Navigate Your Way to A Secure Financial Future with Global Investing.

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