Both INTC and TSLA are limited by how quickly they can ramp up production capacity to meet demand. But, Tesla does not face a shortage of demand for its vehicles. Certainly, the market dominance of Tesla vehicles has eliminated an incentive for Tesla to add certain features that consumers want, such as heads-up displays (HUD) and digital rear-view mirrors. Returning to the INTC and TSLA example, both stocks are affected by demand for their products exceeding supply, but there is no reason to expect INTC to outperform TSLA. Selling an investment that is expected to increase in value to buy one that is expected to decrease in value is a recipe for losing money. Interest rates and bond prices usually move in opposite directions. You should sell an investment when your reasons for buying the investment are no longer valid, not because the investment is performing as expected.įor example, selling stocks now to buy bonds is problematic because bonds are likely to decrease in value when the Federal Reserve Board increases interest rates. The decision to rebalance should be forward-looking, based on expectations about where the stock and bond markets will head in the future. Rebalancing also conflicts with other common strategies, such as buy-and-hold and harvesting losses to offset capital gains. Sometimes, a stock is a low performer for a reason, in which case rebalancing is unlikely to improve the results. When an investment has been demonstrating lackluster performance, there is no reason to expect that it won’t continue to demonstrate poor performance. It also assumes that low-performing investments are hidden gems that will increase in value, without any evidence to support the assumption. Rebalancing assumes that stocks are more likely to decrease in value when their value has increased, which is not necessarily true. It is a pessimistic form of market timing, which is often less effective than remaining invested. Rebalancing is just as guilty of basing investment decisions on past performance as momentum plays, whether the rebalancing occurs on a schedule or upon a specified level of divergence from the target asset allocation. It argues that rebalancing the portfolio is necessary to protect it from a decrease in value.īut, past performance does not predict future results. In the case of TSLA stock, it assumes that the investment will drop in value because it has come so far so fast. Rebalancing is an uninformed strategy that assumes that high-flying investments have nowhere to go but down or, at best, have no room for further growth. The portfolio is worth more than the $81,800 the portfolio was worth back in April, but not as much as it might have been worth without rebalancing. If you had rebalanced your portfolio on April 1, 2021, your portfolio would be worth $98,899 on November 1, 2021, about a fifth less than the $124,300 it would have been worth if you hadn’t rebalanced. Disadvantages of Rebalancingīut, why would you sell investments that are doing well to buy investments that aren’t doing well?Ĭontinuing the previous example, by November 1, 2021, TSLA stock had risen to $1,145 a share and INTC stock had dropped to about $49 a share. Implementing an investment glide path requires rebalancing the portfolio periodically. It reduces the risk mix of the portfolio as retirement age approaches. An example of a linear glide path is the old rule of thumb that the percentage invested in stocks should be 100 minus your age. These investment glide paths reduce the risk mix of a portfolio as the target date approaches. Rebalancing is also a natural consequence of investment glide paths that change the asset allocation over time, such as target date funds.
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