20 Second Advisor: Rebalancing – The pro’s way to buy low and sell high

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:

  1. You’re selling stocks that have gone up in value
  2. You’re buying back bonds that are flat or gone up only slightly in value
  3. 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?

 

 

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