"HW \"Skip\" Weldon" <skip5700removethis@[EMAIL PROTECTED]
> writes:
> My opinion is that the idea that everyone
> should occasionally rebalance is hogwash. Good stocks should perform
> well, and good performance does not necessarily mean that the stock
> (or stock fund) is "overvalued". And it certainly doesn't mean we
With respect to individual stocks, indeed, individuals have
an unfortunate habit of selling winners too soon and/or
holding on to losers too long (to "lock in" gains and,
in the latter and sometimes more unfortunate case, in
the feeling that losses aren't "real" until the sale).
However, in the larger context, "rebalancing" is generally
more about maintaining diversification (ie. in the case of
stocks) and/or maintaining target asset allocations (in the
case of funds, especially index/asset-class funds).
In the individual stock case, if you have 10 stocks and
one of them takes goes up by 10x while the rest double
(let's hear it for optimism...), you went from having
an even distribution across the stocks (and hopefully
across sectors, too) to having 50% of your assets in
a single stock. Even it it's still a good stock, your
****tfolio is now a *lot* riskier.
In the case of asset allocation - suppose you have
80% stocks and 20% bonds. And then stocks tank - say
they go down 20%. While bonds go up by, say, 10%.
Your allocation is now 72+% stocks and 27+% bonds.
There's nothing wrong with your new allocation - but
it's not what you'd planned on and your new ****tfolio's
expected future return is lower (and less volatile)
than your original ****tfolio. If you're okay with the
new plan, that's fine, but it should be *conscious*
choice to keep that new allocation - a choice to have
a different ****tfolio structure than you'd originally
planned for.
> (Caveat: The above assumes the investor is diversified to the extent
> he/she is comfortable and has adequate cash reserves.)
See above re: diverified. Of course, single stock outperformance
of the order-of-magnitude sort is more likely in certain
asset classes than in others. Almost certainly not going
to happen in, say, large-cap-value. But in micro-cap growth,
certainly possible.
--
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