In a magical world where every investment decision we make is a good one, we would always want to buy investments when their price is low and sell them when their price is high. Of course, I’ve written about how earning outsized returns by timing the market is shown not to work consistently, based on decades of industry research. But what if there were a disciplined way to do a small version of this—without guessing?
It turns out that you can, in the form of “rebalancing” your portfolio. When you rebalance, by definition you are selling some of the investments in your portfolio that have performed the best for you and using the proceeds to buy more of what has lagged. Here’s a simple example.
Let’s say that you have a classic, balanced 60-40 portfolio consisting of $60,000 of equities and $40,000 of bonds on January 1st. It turns out to be a good year for equities, and by the end of the year that part of your portfolio has grown to $75,000—a 25% increase! Meanwhile, bonds stayed flat, so you still have $40,000 there. Your total portfolio is now worth $115,000, with a 65.2% equity component and a 34.8% bond component.
In order to bring your portfolio back to the intended 60-40 split, you would perform a rebalance. In this case, you would sell $6,000 of equities and buy $6,000 of bonds in order to achieve that balance. You are selling equities, which were your best performers, and buying bonds, which were your worst performers. That amounts to selling high and buying low.
Let’s do a second scenario, again beginning with a desired 60-40 portfolio on January 1st. This time, equities drop 10% to $54,000, while bonds return 10% to $44,000. Your total portfolio is now $98,000, with a 55.1% equity component and a 44.9% bond component.
Once again, you need to rebalance in order to bring your portfolio back to the intended 60-40 split. This time you would sell $4,800 of bonds and buy $4,800 of equities in order to achieve that balance. You are selling bonds, which were your best performers, and buying equities, which were your worst performers. As before, you are effectively selling high and buying low.
Proper rebalancing can improve risk-adjusted performance over time. While I used a simple example, one can rebalance on a more granular level as well. For example, after last year’s extraordinary international equities performance, many investors have a higher portion of their portfolio in international stocks than they intend. The easy fix is to rebalance by reducing international (sell high) and buying U.S. If you are a “sector” investor (I’m not), you might rebalance your technology sector relative to your energy sector.
Rebalancing works best when it’s done on a schedule or tied to thresholds—not based on how you feel about the market. Whatever your individual use case for rebalancing, you can see how you are able to safely implement a small amount of “sell high, buy low” theory into your portfolio. Be aware: in taxable accounts, there may be tax consequences whenever you sell an asset that has changed in value, so tax goals should be considered before rebalancing.
How ever you choose to use take advantage of this strategy, invest smartly and invest well!
Larry Sidney is a Zephyr Cove-based Investment Advisor Representative. Information is found at https://palisadeinvestments.com/ or by calling 775-299-4600 x702. This is not a solicitation to buy or sell securities. Clients may hold positions mentioned in this article. Past Performance does not guarantee future results. Consult your financial advisor before purchasing any security.
