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Jonathan Clements’ Getting Going – Rethinking Rebalancing
By JLP | December 21, 2005
For some reason Jonathan Clements’ Getting Going column (free) in today’s Wall Street Journal doesn’t sit well with me. I guess because what he’s purporting borders on “market timing,” which is a losing proposition 99.9% of the time for MOST people.
I will agree that rebalancing doesn’t have to be done every year. Why? Because some years your asset class percentages may not change that much. I know this year I am not going to rebalance my wife’s 401(k) because the allocations are still pretty much the same as they were last year, when I rebalanced. Personally, I would say when a particular asset class moves 5% or more, then you should consider rebalancing. In other words, if you have 25% in four different asset classes at the beginning of the year and at the end of the year one of those asset classes is at 30% while the other 3 are at 22%, 20%, 28%, then you will want to rebalance to bring them all back into line.
However, letting things ride because one particular asset class may be changing trends doesn’t sit well with me. The whole purpose of asset allocation and rebalancing is to sell asset classes that are overvalued and buy asset classes that are undervalued. This procedure helps keeps emotions in check. So, my thoughts are that you should rebalance yearly. If, however, you check your allocation and things are still pretty much the same as they were the previous year, then leave it alone for another year.
Topics: Getting Going, Jonathan Clements | 4 Comments »
December 23rd, 2005 at 12:28 pm
I think your 5% rule sounds pretty good.
I don’t like lines like “If you’re a sophisticated investor, you can look at the momentum and you might let it run a little”. How do you know when the momentum is gonna stop? If you really “know”, you’d be enormously rich. Sounds like market timing to me.
December 23rd, 2005 at 12:37 pm
Jonathan,
EXACTLY! Study after study has shown that people do EXACTLY the opposite of what they should do. Rebalancing an asset allocation strategy regardless of what the market is doing makes the most sense. It is a safety net against stupidity.
January 21st, 2006 at 4:28 am
The wrong way to rebalance
In this article, “Rebalancing Act: Why You Shouldn’t Massage Your Portfolio Every Year” at the Wall Street Jounal Online, we are basically told to rebalance if the stocks that performed well in the previous year are not going to perf…
December 25th, 2006 at 5:18 pm
Would like to find your “Getting Going” article from the W.S Journal and the Denver Post titled “Give Yourself a Present: Simplify Accounts”.
Thank you, James Beatty