After wild stock-market ride, this is why it might be time to rebalance your investments

Russ Wiles, Arizona Republic 9/6/2020

Over the past five months, the stock market has vaulted more than 50%. Prices are racing ahead even as the economy continues to struggle, with millions of people still facing financial hardships. A contentious election awaits, and coronavirus problems, while improving, might not clear up for years.

Is it time to take your profits out of the stock market?

Possibly. But there's another way to tamp down on risk without having to pull everything out. Consider making some modest adjustments through rebalancing.

Not everyone will want to rebalance

Young investors with a healthy appetite for risk might just leave things alone for many years, especially if they're buying individual stocks or funds in which they have a high degree of confidence, said David McInnis, a certified financial planner at East Paces Group in Atlanta. But for others, such as those growing more conservative over time, it can be a good way to keep risks under control.

It's a way to manage emotions

Greed, fear and other emotions can work against investors, prompting them to get out of the stock market too early or linger too long. Rebalancing is a way to deal with all that by emphasizing small shifts while maintaining a long-term outlook. It's a discipline for taking certain actions even when they don't feel right.

Rebalancing can lessen overconfidence and help you resist the "house money" effect. As explained by investment firm Research Affiliates, this is the tendency of casino gamblers on a winning streak to stay too long at the table, usually to give back their winnings. So too with many stock-market investors.

Conversely, it provides the justification for keeping at least a toehold in the stock market at all times, helping you to view downdrafts not as cycles to be feared but buying opportunities. On average, bull markets last 54 months on average and result in an average 166% gain, according to J.P. Morgan Asset Management. Bear markets last about 22 months, with an average decline of 42%.

This implies that rebalancing during lengthy bull markets, like the one from 2009 to earlier this year, could be counterproductive, as you would have cashed in some profits rather than letting them ride, McInnis noted. But who's to say the current winning streak will last anywhere near that long?

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