Market timing—trying to predict future market prices and buy/sell accordingly—is usually a fool’s errand, but periodic rebalancing represents a responsible form of timing for the long-term investor. This according to a recent Morningstar article.
“Rebalancing your portfolio means returning your investments to your preferred asset allocation,” the article explains, citing the example of an investor with a 90% stock/10% bond allocation who, after a strong year for stocks, could see the allocation drift to 95% stocks and 5% bonds. “To rebalance your portfolio, you’ll need to sell some stocks and buy some bonds, which can be considered a responsible way to time the market. If stocks had done well that year, selling them means cutting back on stocks when they were hottest. If you’re buying bonds after poor performance, you’re buying low. This improves your chances of meeting your long-term goals.”
The article stipulates, however, that rebalancing should occur regularly. While daily rebalancing isn’t practical for most investors, annual rebalancing is quite effective as it “requires less work and offers less volatility.”
The article states, “Behind the message of responsibly timing the market through rebalancing is the idea of staying the course,“ meaning buying and holding for the long term and adhering to an appropriate asset allocation for your investment goals.
“Periods of market downturns may tempt investors to sell their investments to avoid further loss. However,” the article concludes, holding stocks through losses—and even adding to the stake by rebalancing periodically—allows investors to participate in a stock market recovery.”