You’ve probably heard this advice so often that you’ve come to laugh it off. Of course, we all want to buy low and sell high; the question is how?
The answer is actually simple: it just takes discipline to periodically rebalance your portfolio, whether you do it based on the calendar ever quarter, or when the ratio of your investments gets out of line with your investment strategy..
For example. if your investment strategy is 50% fixed income and 50% stocks, but in the following quarter, stocks rallied and now your portfolio mix is 39% fixed income and 61% stocks (because the stock value grew faster than the bond value). Then it is appropriate to rebalance the portfolio to 50:50 by selling stocks and/or buying more fixed income securities.
In the example above, where stocks have rallied, it can be psychologically difficult to force yourself to rebalance your portfolio. It’s hard to rationalize shifting money from an asset that is performing well into one that isn’t. But don’t think of it as giving up on well-performing assets; think of it as locking in some of your gains. Cutting back on the current “winners” and adding more of the so-called “losers” forces you to buy low and sell high.
Many financial experts recommend that investors rebalance their portfolios on a regular basis: every six or twelve months. The advantage of this method is that the calendar reminds you when to rebalance. At Rosen Investment Management, we automatically rebalance our investors’ portfolios every quarter, after considering the tax implications of selling off assets, unless the asset ratio has not changed very much.