This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Should You Skip Mid-Year Rebalancing?

NEW YORK (TheStreet) -- Disciplined investors know it's important to stick to the plan. If a stock surge leaves your portfolio with 65% stocks instead of the 60% you'd intended, well, it's time to sell some stocks and move the proceeds to bonds or cash.

At least, that's the standard advice. But stocks have kept climbing this year, surprising many who thought last year's stupendous gains would be too tough an act to follow. Should you just skip that midyear rebalancing to keep riding the stock market wave?

First consider your investing time horizon. If you're investing for a retirement that won't start for 20, 30 or 40 years, a short-term tactical move such as delaying rebalancing probably won't make much difference. Asset allocation strategies are based on long-term market patterns that tend to smooth out short-term ups and downs. And lots of research shows that even the pros aren't very good at market timing.

Also see: Mortgage and Housing Outlook at Midyear Is a Muddle

Second, what's the opportunity cost of, say, keeping a higher-than-planned portion of the portfolio in a given asset class? Opportunity cost is the price you pay by not moving your money into that other asset. If you stay in stocks and bonds do better, you'll miss some gains. 

Granted, bonds don't look very appealing right now, because rising interest rates could undermine bond prices. But even if bond returns are weak, they could beat stocks if investors start to get anxious about high stock prices, causing them to flee the stock market and drive prices down.

Third, be realistic. Keeping 65% of your holdings in stocks instead of 60% probably would not have a dramatic effect on your returns, even if stocks did well. If stocks gained 10% and bonds were flat, a $100,000 portfolio with 65% in stocks, 35% in bonds, would grow to $106,500, while the 60/40 portfolio would grow to $106,000.

Also see: What Do You Do When Your Bonds Give Nothing Back? Don't 'Chase Yield'

Fourth, how will you get your plan back on track? Before committing to a higher-than-planned stock allocation, it would be wise to set some rules for reversing course. You could set a deadline or vow to pull back on stocks if the ratio between share prices and corporate earnings rises to a given level. Or you could put a larger portion of new investable cash into bonds to get back to the desired portfolio balance over time. 

Finally, think about how you'll feel if things go wrong. If you keep more of your holdings in stocks and they plunge, would your long-term plan fall apart? Would you hate yourself? Or could you shrug it off as a lesson learned? 

Investors have every right to tinker with their long-term plans as conditions change. After all, asset allocation strategies are based on past patterns that won't necessarily be repeated. But short-term gambles do have a way of backfiring.

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
AAPL $95.03 0.21%
FB $116.73 0.00%
GOOG $691.02 0.00%
TSLA $247.54 -0.07%
YHOO $36.59 0.00%


Chart of I:DJI
DOW 17,830.76 -210.79 -1.17%
S&P 500 2,075.81 -19.34 -0.92%
NASDAQ 4,805.2910 -57.85 -1.19%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs