Peas and Portfolio Rebalancing

Posted on September 21, 2010 at 11:00 AM PDT by

As a young child I had an ongoing battle with my mother over eating my peas. It may have related to the fact that the peas she served came from the Del Monte can, pale and overcooked, or possibly from the ubiquitous childhood disdain for anything green. Whatever the reason, the peas had to be eaten before I could leave the table and so I choked them down.

Portfolio rebalancing suffers the same disdain amongst many investors as does eating vegetables amongst children. Why would an investor want to sell those equities that are outperforming and buy more of those that are underperforming? But just like a parent who will not allow her child to live on dessert alone, a smart retirement investor accepts rebalancing as an irreplaceable discipline that results in portfolio health.

Portfolio rebalancing is the process of bringing the different asset classes back into proper relationship following a significant change in one or more. More simply stated, it is returning your portfolio to the proper mix of stocks, bonds and cash when they no longer conform to your plan.

Reams of research have demonstrated that disciplined portfolio rebalancing adds to returns over time. In additional to enhancing performance, rebalancing also provides the added benefit of reducing your portfolio’s risk profile. Like healthy eaters who learn to cherish fresh vegetables, healthy investors also learn to celebrate each rebalancing.

Below are a few articles that reinforce the power of rebalancing.

Webcast: Commodities and Asset Allocation– Roger Gibson’s research reveals the compelling truth surrounding portfolio rebalancing. His math shows that an investment of $1 in the S&P 500 in 1971 would by this year have grown to $32.07. An identical investment in commodities would have increased to $36.26. A 50/50 portfolio, however, built of both asset classes and rebalanced annually returned a shocking $52. As Roger puts it in the webcast, “The whole outperformed the components.”

Buy & Hold, Asset Allocation And Rebalancing– This article in iStockanalyst provides a simple review of the value of asset allocation and disciplined rebalancing. The author notes, “there’s also the challenge of deciding when to rebalance . . . it pays to monitor the major asset classes for signals that enhance the odds of rebalancing at timely moments.” With MarketRiders, you don’t have to stare at your portfolio wondering when the right rebalancing moment will come. Our algorithms monitor your portfolio 24×7 and will alert you to ideal moments to bring your portfolio into focus.

The joy of portfolio cooking, now easier and less expensive– In this article, Scott Burns celebrates the low-cost ETF revolution that is afoot at Schwab, Fidelity and Vanguard. Why pay ten times more for mutual fund management when it underperforms a diversified ETF portfolio and can easily be managed through a service like MarketRiders?

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