Now we have your attention! After going to numerous conferences this year and witnessing this Bull Market approach 9 years, we are starting to hear more about what we should do when the market pulls back.
While we do not subscribe to market timing, we do believe in Rebalancing. An important strategy not often discussed or implemented among most investors. Rebalancing simply means you sell high and buy low. More specifically, you sell assets that make up a higher percentage of your portfolio than originally targeted. And vice versa, you buy assets that have a lower percentage of your portfolio than desired. The classic example of rebalancing when the market trends downward is that it forces you to sell bonds and buy stocks.
Rebalancing is best done with tolerance bands. Meaning you set percentage ranges for each asset class. Trading is only triggered once that asset grows above or falls below these thresholds. You do not want too much trading, particularly in taxable accounts. We also believe rebalancing must be scheduled in advance and done without human interaction.
The fear emotion when investors are losing money is more powerful than the greed sentiment when markets are favorable. Investors can feel helpless and the last thing they want to hear is “have faith things will get better”. Even though this is sound advice and proven time and time again, investors often need to take action as their accounts decline. Rebalancing is a strategy that satisfies the feeling to do something, reduces portfolio risk, and improves long-term results. So before the next downturn, make sure you have a rebalancing strategy in place. Your future self with thank you!