As July rolls around and I systematically rebalance portfolios, I thought it may be a good time to cover the question: why do we rebalance?
When markets are at all-time highs, I get a lot of questions about timing- is this a good time to buy? Are stocks too expensive? What stocks are on sale and good values? When do we sell and take profits?
I don’t have all the answers to these questions, and neither does anyone else.
Confusing lifelong investing with short-term stock trading is a common misconception- they are two different games: one is easy to win with commitment and discipline, and one is almost impossible.
An honest advisor to lifelong investors wouldn’t even hazard a guess- not only because they really don’t know, but thank goodness, it doesn’t matter.
I do know what human nature wants to do: buy whatever is going up on a rocket, and dump whatever isn't blowing our socks off.
I also know that we have selected a diversified portfolio based on your personal goals, time frame and risk-tolerance- percentages of stocks and bonds that have historically produced the range of growth and income we’re aiming for, while reducing the risk of having too many eggs in one basket.
These percentages can shift as markets go up or down, and systematic rebalancing helps us trim the asset classes that have become relatively overvalued, and increase our exposure to those investments that may be undervalued and attractively priced.
While this doesn’t guarantee superior outcomes in every case, rebalancing is the most rational way to maintain your target portfolio and eliminate that nagging impulse to time markets and overthink investment choices- quite literally forcing us to "buy low, sell high".
Like many other key investment principles, “this quite rational discipline is the direct opposite of our basic human instincts.” (Nick Murray)
This is the paradox of investing, so simple intellectually, yet so difficult emotionally. This is where an objective advisor can help!
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