Thursday, January 24, 2013

Stocks Are Up; I'm Rebalancing

You may have heard that stocks have been hitting five-year highs lately. When you hear this in US news sources, they usually are referring to the S&P 500 or the Dow Jones Industrial Average. Of these two, the S&P 500 is more representative of the broad US stock market, but it leaves out most smaller cap stocks.  Broader indexes that represent the total US stock market are up even more over the last five years. Given this strong performance, I have come close enough to my rebalancing band for stocks vs. fixed income that I have sold some of my US stock funds.

My target allocation for stocks is 30% of my portfolio. This is a low allocation to stocks for someone my age, but I'm fortunate enough that I don't need to take much risk, hence the low stock allocation. My stock allocation has been getting very close to 35%, which is my target for rebalancing by selling some of my stock funds and buying some fixed income (bonds, CDs, etc.).

So far I have liquidated my positions in two US stock ETFs that I didn't want to own long term anyway, thus further simplifying my portfolio as well as reducing my allocation to US stocks. I am in the process of transferring those funds into a 5-year CD earning 2.0% APY, which is about as good as you can get these days (due to the interest rate risk with interest rates so low, I generally prefer CDs to bond funds, although I still have about 50% of my fixed income in bond funds).

This rebalancing move gets me to about 32% in stocks, so I'll probably take a look at more rebalancing to get closer to my target of 30%. In doing so, I'll also consider my allocation between US stocks and international stocks.

My previous rebalancing move, in May of 2012, was to add to some of my international stock funds and sell some of my US stock funds, since international stocks had under-performed US stocks by a wide margin. I also added some cash to international stock funds. See my post What About Europe? for more on that rebalancing move. Note that since the lows in May, total international stocks are up almost 19% while total US stocks are up about 15%, and European stocks are up almost 24%. It wasn't preordained to work out this way, but it is an example of how reacting to worries in the news can be counterproductive to rational investing; often doing the opposite of what feels comfortable works out well.

It's important to note that I am not trying to time the market; i.e., I am not predicting that stocks will fall in value. Instead, I am following a fairly methodical approach of maintaining a target exposure to different types of risks. This approach tends to result in reducing my allocation to stocks after they've appreciated significantly, and increasing my allocation to stocks after they've fallen in value. This is the opposite of what investors in aggregate tend to do.

1 comment:

  1. Awesome, I understand everything in this post. A couple months ago, it would have been Jibberesh to me