Flip-Flopping Beats Staying the Course

In an uncertain market headed in no apparent direction, more frequent rebalancing generates more lasting gains over time. When generated through fund exchanges within a retirement savings portfolio, these lasting gains from rebalancing are unfettered by immediate income taxes or direct trading costs. Since retirement savings account fund options are generally valued once a day at the market close, you could even rebalance your retirement savings on a daily basis as long as you abide by the funds' frequent trading rules.

In its simplest form, a type of daily rebalancing known as 401(k) day trading calls for an investor holding stock and cash to sell some stock on days when the market is about to close higher and to buy some stock when the market is about to close lower. Since the beginning of 2000, this type of daily rebalancing returned 21.5% better than the S&P 500 index through Oct. 31.

Obviously, adapting to changing conditions has applications beyond foreign policy. Just as flip-flopping earlier could have been a better approach to deal with Iraq, more portfolio rebalancing is an effective way for you to draw lasting gains out of an uncertain market.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Richard Schmitt is an actuary, adjunct professor at Golden Gate University, and author of 401(k) Day Trading: The Art of Cashing in on a Shaky Market in Minutes a Day.

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