Did You Rebalance?

As we reach a new quarter, this is a time when many choose to rebalance.

You also hear about mutual funds changing their holdings for “window dressing” (or making it look like they only own good stuff).

So, what did you do during the recent financial crisis? Did you rebalance when your stock allocation shrunk (violently) relative to your target bond allocation?

For many, the answer is no. We all know that the textbook says to rebalance. But “this time it’s different” did not just apply to the causes of turmoil, it applied to our reaction as well. Too many decided not to get their pie chart back into shape and get back to a risk level they once thought was reasonable. Instead, they held tight to see how things would shake out.

What would happen if you did rebalance? It depends. Had you rebalanced at the beginning of March, you’d feel pretty smart right now. Heck, you might even have to re-rebalance and sell some of the stocks you recently bought after taking a 30% gain! Rebalancing sooner and/or more frequently wouldn’t have been dramatic, and I’m too lazy to do the math, but I think you’d still have done OK (I’m much more confident that 10 years from now you’d be thanking yourself).

The suffering is not over. Hopefully we’ve seen the lowest lows that you and I will ever see in our lives, but the market could nosedive again and go even lower. In any case, it probably won’t be as smooth as the last few months have been. We won’t have a hard time finding bad news in the coming months.

Nevertheless, this is a time to ask yourself what you did – if anything – and why.