Big Year? Now Rebalance

Submitted by Dan Crimmins on Thursday, March 12, 2015 - 12:00pm
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“The loser now will be later to win,” Bob Dylan sang, and nowhere is this truer in recent years than on the see-saw of Wall Street. Making the most of the market means constantly reassessing and rebalancing your holdings, especially after a banner year – for some stocks, anyway – like 2014.

The large publicly owned U.S. companies shone among the asset classes with excellent returns for 2014. Look at the Standard & Poor’s 500. The S&P index, which tracks the largest U.S. companies on the New York Stock Exchange, rose 11.39% for the year. Total return, which counts reinvested dividends, hit 13.69% for 2014.

Other segments of the domestic market did not fare as well, notably small U.S. publicly traded companies. The Russell 2000 Index, which measures their performance, saw a total return of only 4.89% in 2014.

In addition, the international developed markets – companies based in continental Europe and in the Asian-Pacific region – also trailed U.S. counterparts. These markets’ tracking index, the MSCI World ex-USA Index, rose 6.8% in local currency, but lost 3.88% when translated into U.S. dollars.

So what do you do now with your investments? One market way up, one way down: A semi-permanent trend or just a blip?

The answer, as usual in investing, comes back to clarifying what you want to achieve. Determining this focuses you on why you own shares of publicly traded companies in the first place: to participate in their long-term historical growth.

Your original asset mix inevitably changes after differing returns of various securities and asset classes; the percentage that you allocate to different asset classes likewise changes. If you passively let your holdings run, your account can over-allocate to certain kinds of equities after those securities see strong returns.

To rebalance, you might sell a portion of the asset class that increased above your optimum target. It’s likely your large-capitalization U.S. stocks did this in 2014: The more returns they made and you re-invested, the more these securities made up a swelling fraction of your portfolio.

Then redirect the surplus money to an asset class or classes that is below target allocations among your holdings, stock in the small U.S. and international companies that didn’t enjoy such a rousing 2014. Set specific allocations for each asset class based on your values and goals.

This simple – but not easy – procedure allows you to crack the real secret to successful investing: Selling high and buying low.

Fixed target allocations take the emotion – and hasty or panicky decisions – out of your investing; a consistent investment philosophy allows you to exercise the discipline and patience to maintain your focus, especially on asset classes that underperform from time to time (as they all do).

If you need assistance in this discipline, hire a financial coach to help. Even the best long-term plans need a tinkering now and then.

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Dan Crimmins is the co-founder of Crimmins Wealth Management LLC in Woodcliff Lake, N.J. His blog is Roots of Wealth.

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