One of the housekeeping chores investors deal with from time to time is “rebalancing” their portfolios.
It’s like four people playing a game of Monopoly. Everybody starts out with 25% of the money, but after a few rounds of play, some are richer and some poorer. To get back where you started, you’d have to “rebalance” by taking money from some players and giving it to others.
Let’s assume you’ve been following our Upgrading strategy, and you divided your money among the risk categories as suggested last January. In the months that followed, as some funds and categories did better than others, the percentages you started with began to change. It could also be you’re following more than one SMI strategy, and the percentages allocated to each are no longer where they started.
We suggest the first week of each new year is a good time to step in and restore order. This also allows you to take our new allocation guidelines into account at the same time. A high degree of precision isn’t needed. As we pointed out in Striking A Blow For Simplicity In SMI’s 2016 Upgrading Allocations, as long as a person is within a few percentage points of his or her long-term allocation targets, that’s probably close enough (especially if there are costs involved in making further trades to get closer to the target allocations).