Ask Money

Rebalance portfolio?

Chris Farrell Oct 8, 2008

Question: I’ve generally tried to rebalance my portfolio at the end of each quarter. However, with the stock market volatile and descending, I’m reluctant to rebalance toward stocks until I see some stability in the market. What’s your recommendation regarding asset allocation and portfolio rebalancing in these troubled times? Mike, Woodbury MN

Answer: Whew, it’s hard to sell a good performing asset and buy a poorly performing one under normal circumstances, let alone during a bear market. From your email, it sounds as if you’re pleased with how you’ve allocated your money between various investments, such as stocks, bonds, and international equities. It’s the timing of getting back to the percentages you choose that’s troubling you. “Rebalancing is critical during these periods,” wrote Ross Levin, a certified financial planner and head of Accredited Investors Inc. in Edina, Mn. in a recent letter to clients. “By systematically rebalancing, you are forcing yourself to buy low. It has worked for us time and time again in my twenty-six years in this business.”

The list of unthinkables that has happened recently is long and growing. But I still think that Ross Levin is right. Rebalancing will pay off. And there’s no question that doing nothing will impact your asset allocation. For example, suppose you divided your portfolio into 60% stocks and 40% bonds. But after that you didn’t touch it. According to recent calculations by money managers Mark Kritzman, Simon Myrgren and Sebastien Page stocks would have varied from a low of 33% to a high of 99% during the past eight decades. Moreover, they add, the portfolio would have been more than 10% over-weighted in stocks nearly 75% of the time.

You can rebalance your portfolio either by redirecting future purchases or by shifting money among current holdings.

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