I’ve been getting a lot of questions about market timing. Most of the questions are something like this:
“This bull market can’t last forever. When do you think the market will go down and what should I do to protect myself?”
Unfortunately, it’s pretty much impossible to time the market. Study after study has shown that professional managers can’t reliably time when a market will turn; however, smart investors can rebalance! Let’s say you have a 60% stock / 40% bond portfolio. During the last 18 months, stocks have had a great run. As such, stocks in your portfolio should have increased in value. That same 60/40 portfolio might look like a 65/35 portfolio today. By rebalancing back to your target 60/40 allocation you accomplish the following:
- You’re selling stocks that have gone up in value
- You’re buying back bonds that are flat or gone up only slightly in value
- You’re reducing your portfolio risk
By systematically rebalancing (no emotion / market timing involved), you are selling stocks when they are high and buying other asset classes that haven’t gone up as much in value. This is a great practical way to reduce risk if you are worried about a market correction.
Is your portfolio regularly rebalanced?