Friday, February 15, 2008

Rebalancing when its UGLY out there

If you're like most investors, your portfolio has seen some pretty dramatic swings in the last 3 months. The S&P 500 has declined 19.4% since its high mark in mid October 2007 to its recent low on January 23, 2008.

And because some assets go up or stay steady while others fall, your asset allocation is probably out of whack by more than just a percent or two. It’s probably time to rebalance. Argh. Nobody wants to sell their winners and feed the dogs, c’mon. There has got to be a better way.

The best way I know to keep an allocation balanced, is to adjust my dollar cost averaging scheme. I prefer to affect the rebalance by adding new money to the asset that is lagging. I am able to stomach that more easily since the purchases are in small chunks and I am letting my winners run. I also adhere to the classic rationalization that I am buying more shares at cheaper prices.

When my asset allocations start to deviate from my plan by more than a couple of percent, I take action. I begin by redirecting a DCA purchase from a winner to the lagging asset, which could result in doubling up on the amount of money going into a particular asset.

VGSLX is at the top of my laggard list. It’s a Real Estate Investment Trust fund and it’s the worst performing asset that I own. However, it is a permanent holding, meaning it is part of my diversified portfolio that I plan to hang on to forever. Forever is a long time and certainly this fund will rebound given some time.

Of course, we would all like to buy in at the bottom. I keep watching VGSLX gyrate up and down, but mostly down. How bad are things going to get? Is the economy going to slow down even more? With all these uncertainties – it’s a good thing that I have DCA or I might never buy in!

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