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By Richard Schmitt
NEW YORK (
TheStreet) -- This year investors seem to like what the stock market is offering. Through three quarters, the
Standard & Poor's 500 index stands 14.6% higher than where it began 2012. With the broad U.S. stock market still hovering near multi-year highs, many giddy investors continue to pile into the market for more good times in this election-year rally.
Never mind the market support offered by some pretty serious government intervention in the form of more monetary easing and continued deficit spending. When that gig is up, those sticking it out in the market can only hope that good old American ingenuity and resourcefulness will prop up an otherwise limp economy hobbled by tepid GDP growth of less than 2%, continued high unemployment that recently just eked below 8%, and an impending fiscal cliff that promises higher individual taxes to pay off record debt of over $16 trillion.
Then in our interdependent world economy, there's Europe with its own sovereign debt problems and China with its stalled growth.
These short-term worries for stocks are enough to give a buy-and-hold investor pause. Furthermore, his angst increased as he witnessed his set-it-and-forget-it portfolio facing a couple of harrowing market drops followed by equally impressive turnarounds since 2000. Yet after all this, the current market highs have only managed to bring this same guy's broad stock portfolio back to the level it first reached over 12 years ago.
If only an investor had the foresight to sell when the market was up and to buy when the market was down, he could have ended up ahead of where he is now. That's where portfolio rebalancing comes into play.
Periodically just take some money off the table when one asset class outperforms another by selling off some of the outperforming asset class and investing the proceeds in the portfolio's underperforming asset class(es). This portfolio rejiggering is intended to get an investor back to his original or target asset allocation.
Rebalancing allows an investor to reap gains in an overweight asset class -- like stocks of late -- and plow the proceeds into underweight asset classes -- like bonds or cash -- which may be poised to perform better in the future. Essentially, this rebalancing results in selling stock high to capture gains and buying other lagging asset class(es) low to set up future gains.