Buy low, sell high. Sounds simple enough, but unfortunately our behavioral biases as investors can get in the way of this elusive goal.
That’s why some financial advisors use portfolio rebalancing to instill investing discipline and remove emotions from the equation.
And rebalancing becomes even more important after big market moves. For example, the S&P 500 rallied more than 30% in 2013.
Some investors find it psychologically difficult to rebalance because it means going against the grain. It involves selling winning investments, and buying sectors that have decreased in value.
Rebalancing is designed to bring back the original portfolio allocations so investors maintain the desired risk profile.
“For a portfolio that started the year with 60% of its value in U.S. stocks and 40% in bonds, the 32% year-to-date return in the S&P 500, coupled with the decline in bonds, would leave the split today at 67% in stocks and 33% in bonds,” according to a recent WSJ.com report.
“It may seem counterintuitive but the best way to decrease risk in your portfolio is to trim your winners and feed your losers,” reports Matt Nesto for Yahoo Finance’s Breakout.
Rebalancing may call for cutting U.S. stocks in the portfolio after the big rally this year. The S&P 500 also outperformed several asset classes such as bonds, commodities and real estate by a wide margin.
“The year would emphasize why rebalancing is so essential to prudent portfolio management. Essentially, it is a risk-reduction tool, as opposed to a return-maximization technique,” says Eleanor Blayney, a consumer advocate of the Certified Financial Planner Board of Standards. “If ever there was a time when rebalancing made sense to take some risk off the table, 2013 is it.”
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DISCLAIMER: The information in this material is not intended to be personalized financial advice and should not be solely relied on for making financial decisions. All investments involve risk, the amount of which may vary significantly. Past performance is no guarantee of future results.