Investors who held equities through 2013 might say the year’s lesson was obvious: Buy and hold stocks!
But I think if 2013 were a wise teacher speaking to a classroom of investors, the year’s lesson would be about portfolio rebalancing.
The year-as-teacher would emphasize why rebalancing is so essential to prudent portfolio management. Essentially, rebalancing is a risk-reduction tool, as opposed to a return-maximization technique. If investors need a simpler, more compelling explanation, 2013 could say that rebalancing is an efficient way to “sell high, buy low” – a strategy that all investors would endorse as the surest formula for building wealth, but few implement consistently.
The teacher might then talk about why, if rebalancing is so smart, it’s so hard for investors to do. The problem, as the year will demonstrate, is that few investors are inclined to pare back an asset class that is booming to reposition into an under-performing class.
The lesson of 2013 can’t be an “I told you so” lecture – only subsequent years will determine if rebalancing is the smartest thing for investors to do now. But 2013 can certainly say, “I am telling you so,” more loudly and clearly than has been the case for any year in some while.
The long-term benefits of rebalancing are hard to measure when the discrepancy in asset-class returns is relatively small. Many would argue the transaction costs outweigh the benefits. But 2013 was a year with an historic return spread between stocks and bonds. If ever there was a time when rebalancing made sense to take some risk off the table, 2013 was it.