Common Cents

Portfolio rebalancing

2013-02-10T17:14:00Z 2013-02-10T17:14:40Z Portfolio rebalancingTom and John Mills Napa Valley Register
February 10, 2013 5:14 pm  • 

Recent news states that domestic equity indexes are booming. The Dow Jones industrial average and the S&P 500 are both close to their 2007 highs.

This is good news. Good equity markets present opportunities, but also bring challenges.

Most diversified portfolios will have a range of investments. These investments will vary in risk and most likely will contain a portion of equity investments. After a good bull run, it might be a good idea to rebalance to ensure your overall risk level doesn’t creep higher.

Rebalancing is important when you have assets that have grown more than others. Rebalancing can be difficult; in essence, you are reducing assets that have performed well by increasing others that have lagged.

This is also true in bad markets. Rebalancing in bear markets requires selling possibly safer assets and putting the proceeds into assets that have just slumped. This can be scary, but necessary.

Rebalancing is in line with some of Warren Buffett’s advice about investing. Buffett explained his own success by stating that he sold when others were greedy and bought when others were fearful. Rebalancing after a great market is similar to selling when others are greedy.

Some studies cite that good markets can be more stressful than bad ones, because people sometimes feel like they missed out on the upside. This can be exacerbated when investors hear others brag about their investing success. It is important to never compare your results with others’. People often exaggerate and even lie about investment performance.

In one interaction, we met a lady who claimed she had a strategy that consistently produced 16 percent returns without taking risk. She didn’t realize that such a claim made her one of the most brilliant financial minds in the world. Try comparing your performance with your own long-term goals.

Remember that the market has cycles. If you knew nothing about the economy or capital markets, you should know that after great runs come great falls. Good markets can cause people to forget bad ones. Remember that markets can turn — and will. Don’t get caught being greedy.

A financial plan should be a living document. Life is full of changes; as those changes occur, the financial plan should be revisited and changed as well. Very good investment performance counts as one of those changes. If assets have grown more than expected, investors may need to alter tax, estate and gift planning. Revisit your plan.

Almost every event in life provides opportunities and responsibilities. This is especially true with investing. Good markets are enjoyable, but they require investors to stay alert. Don’t be lulled into a sense of security; you never know what is around the corner.

Tom and John Mills are registered investment advisers and certified financial planners. Reach them at 1030 Seminary St. Suite D, 254-0155,, or

Copyright 2015 Napa Valley Register. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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