Rebalancing is when you sell the thing that made you money and buy the thing that lost you money. Financial advisors call this "maintaining your target risk." Normal people call this "buying high and selling low with extra steps."
The pitch goes like this. Stocks went up. Bonds went down. Your portfolio is now too heavy in stocks. So you trim stocks at all-time highs and shovel that cash into bonds that just got their asses kicked. This restores your original allocation. You're back to 60/40 or whatever arbitrary split you agreed to when you didn't know what you were signing.
Advisors love rebalancing because it sounds disciplined. It has rules. It requires action. And it generates fees when they do it for you.
Here's what they won't say. If stocks keep ripping and bonds keep eating shit, you just sold your winner to buy more of your loser. Congratulations. You're now underweight the asset that's working and overweight the asset that isn't. But at least your pie chart looks like it did in 2023.
The opposite is also true. If stocks crater tomorrow and bonds rip, you're a genius. You sold the top and bought the bottom. You rebalanced right into a reversal. The advisors will take credit. They'll show you the charts. They'll explain how the process works over time.
What they mean is this. Sometimes rebalancing makes you money. Sometimes it costs you money. Over the long run it might smooth your returns or it might just smooth their income.
But sure. Sell your stocks at all-time highs to buy bonds in a sell-off. That's definitely a strategy. It's also definitely the exact opposite of what every retail trader does when they panic, which means it's either smart or just a different flavor of stupid.
Photo by Infrarate.com on Unsplash
Leave a Comment