Why Rebalancing Could Be a Huge Mistake

Here is the article to read. Here is the link of podcast.

This lets you set an overall risk profile for your portfolio—for example 60% equities and 40% bonds—and maintain that profile through the ups and downs of the stock market. You know the drill: After a big decline in stocks, buy more (by selling bonds) at low prices; after a big run-up in prices, sell some stocks (when prices are high) and buy bonds.

This is a good strategy. If you didn’t do this, over time you would most likely wind up with a portfolio that’s increasingly heavy on stocks—perhaps 70% when you wanted 60%. That would leave you with a higher risk profile.

So here’s my advice, in three parts.

First, all investors should continue to rebalance between stocks and bonds. This is a legitimate tactic for controlling risk.

Second, young investors probably will do better over the long haul if they don’t rebalance among equity asset classes. Remember the $6.6 million (no rebalancing) versus $4.2 million (annual rebalancing) over the past 50 calendar years.

Third, older investors, certainly including retirees, should be more conservative and not let any single asset class get too far away from its target percentage. For these investors, rebalancing is probably a good idea. It doesn’t have to happen every year, but it should happen at least every four or five years.