By John Wasik
CHICAGO, April 5 To some, spring means cleaning,
renewal and yard work. For nervous Nellies like me who still see
the ghost rider of 2008 in my rear-view mirror despite the
market being up sharply so far in 2012, it means rebalancing my
There's nothing sexy about rebalancing. You simply plod
through your account statements and reorient your nest egg
toward your objectives while lowering risk. The crux is that if
you do it right, you are purchasing less-favored assets and
selling higher-valued securities. In other words, you are buying
low and selling high, which is what most investors consistently
fail to do. Far too many folks buy on the way up and hope that
good times will continue indefinitely, thus ignoring the
If you don't rebalance, your portfolio gradually becomes
dominated by higher-risk and potentially over-valued assets.
When the eventual correction or crash comes along, the resulting
fall is much steeper - if you haven't rebalanced.
I took a peek at my portfolio recently, and due to the bull
run of late, I noticed that stocks comprised almost 58 percent
of our joint 401(k) and individual retirement account holdings.
Since my wife and I resolved that we'd never let stocks comprise
more than half of our portfolio, we'll have to make some
adjustments. We still haven't completely recovered from the
train wreck known as the 2008 meltdown. As you can imagine,
we're more cautious these days.
For my family's portfolio, based on my age of 54, I like to
invest at least half in fixed-income. As a rule of thumb, your
age should roughly match your target fixed-income allocation, if
you're a moderate to conservative investor.
According to a study by the Vanguard Group, "if a portfolio
is never rebalanced, it tends to drift from its target asset
allocation as the weight of higher-return higher-risk assets
increases." (for the full study see)
In terms of reducing overall portfolio risk, Vanguard
researchers found that while portfolios that were never
rebalanced had an average annualized return of 9 percent from
1929 through 2009 - versus 8.5 percent for balanced portfolios--
the standard deviation (a volatility gauge) was a full 2
percentage points lower if rebalancing was done monthly. That
was for a portfolio of 60 percent stocks and 40 percent bonds.
For most investors, though, rebalancing is like taking the
whipped cream off a pie before you eat it. Unless you're in
automatically rebalanced target-date or age-adjusted college
savings portfolios, you'll have to make an extra effort to put
it in motion.
In my own case, my wife and I will work with our mutual fund
company (Vanguard), which provides a financial planner who can
walk us through rebalancing as part of our service plan. We'll
have to sell some shares of our stock funds to purchase stakes
in our bond-index and treasury-inflation protected securities
Most larger mutual fund companies and some brokerage houses
provide auto-rebalancing, although it can get complicated
outside of tax-deferred retirement accounts. Most competent
registered investment advisers and certified financial planners
provide this service and give you big picture advice on
portfolio allocations customized to your financial goals.
Do you have a 401(k) with your employer? Ask them if they
provide automatic rebalancing and set it up if they do.
According to David Wray, executive director of the Plan Sponsor
Council of America, a group representing employer retirement
plan providers, while he's not sure how many employers provide
this service, "virtually all" third parties who administer the
plan platforms are set up for auto-rebalancing.
But don't expect your co-workers to be talking up
rebalancing at the water cooler. By another estimate, while more
than half of employers offer auto-rebalancing, only 7 percent of
employees use the service, according to Aon Hewitt, the benefits
consultant, which polled employers last year.
Keep in mind that in taxable accounts, securities sales can
trigger taxable capital gains. To simplify matters, you can
choose to channel dividends and gains into a money-market
account, where the funds can be used to buy shares during the
You can set up your auto-rebalancing by date or asset level
indicators - or both. Say you don't want stocks to be more than
60 percent of your portfolio or you just want to do
auto-rebalancing twice a year. That's easily doable if your
broker, employer or fund manager has this service.
At the very least, be honest with yourself and determine how
much exposure you want to the stock market. Rebalancing may be a
difficult and awkward discipline at first, but for the modest
sacrifice you'd make in performance, you'll probably be able to
sleep better at night.