You’ll note that I last discussed the topic of rebalancing in September, 2008.  The market was in a tailspin, to put it mildly.  The Dow Jones Industrial Average was at 10,800, off considerably from its October, 2007, high of 14,000.  Bear Stearns was gone.  Lehman Brothers was gone.  AIG was effectively owned by the U.S. Taxpayers.  The credit markets were in complete disarray and confidence in our financial system seemed to be worsening every day.

In the midst of this financial chaos, I ‘blogged’ that the market had created an opportunity for clients to rebalance their portfolios.  What I should have continued ‘blogging’ was that this opportunity was not simply a ‘one time’ event in a market downturn, nor should it be considered a one-way street.  As most investors are well aware, the Dow continued to slide until it hit bottom at 6,625 in early March, 2009.  For investors, this meant they had to continue to rebalance by investing in equities in January, February and March.  I can promise it felt a little bit like catching a falling knife, and was not an easy conversation to have with clients, nor an easy decision for the majority of them to make. But again, as in the past, it proved to be the right decision.

Yes, the Dow currently sits at the same level as it did in September, 2008.  However, the investor willing to rebalance in September and who had the intestinal fortitude to continue rebalancing as the market declined, has seen a fair amount of growth in their portfolio to date.  As a result, these valiant investors most likely have more exposure to equities than agreed upon in their long-range plans, and hence, have another opportunity to rebalance.

Yes, you may have put money into the equity markets 12 to 16 months ago, but it may very well be time to take some out in order to maintain the agreed upon level of risk in your portfolio.  It is important to remember that history shows that a “let it ride” strategy doesn’t provide the same protection and growth as rebalancing, and even though we aren’t at 2007 market levels, I’ve never seen anyone ‘go broke taking a profit.’

Rebalancing is one of the stalwart strategies of a well-designed and well-managed investment portfolio, and although it can be difficult to act in a manner that often seems counterintuitive—we know it is a prudent strategy that, over the long-term, almost always helps our clients avoid the perfidy of volatile markets.

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Eric Kittner, CFP®, CPA

Eric is the professional consultant for Joe Sheehan.