Friday, October 10, 2008

Do You Have the Nerve to Rebalance Right Now?

I’ve never been one to maintain a particular percentage balance between stocks and bonds like 70/30 or 60/40. However, many people do this on the theory that they are rebalancing buy selling something whose price is high to buy something whose price is low.

The advantage of this approach is that it’s a disciplined way to buy low and sell high. On the negative side, it has investors holding low-return bonds for the long-term. However, for investors who can’t stomach an all-stock portfolio, the fixed ratio approach isn’t a bad one.

Larry MacDonald wrote an interesting and amusing article titled the stock market hates you that does a good job of capturing our fears right now. We’re so nervous that many of us are abandoning our financial plans.

Recent price drops in the stock market have thrown the stock/bond balance of investors’ portfolios out of whack. The percentage in stocks has dropped and the percentage in bonds has risen. So, my question is do you have the nerve to rebalance right now?

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