Looking for an excuse to rebalance your portfolio? Here’s one: all the major asset classes, including my somewhat subjective list of proxy ETFs below, are sitting on gains this year, as of Friday, August 10.
Is it timely to rebalance a broad mix of assets? Probably, although it would help if we knew what the future holds. Alas, we don’t. What is clear is that systematically rebalancing a wide array of asset classes has an encouraging record of earning competitive returns. But tapping into the rebalancing bonus isn’t a free lunch. The price of entry: a contrarian mindset. That’s too pricey for most investors, which is why so few are able to exploit rebalancing in something close to a high degree. But that leaves lots of opportunity for the select few who have the discipline to harvest the rebalancing bonus by exploiting volatility. The relationship, by the way, is no accident. The reason why expected returns from rebalancing are so attractive is directly linked with the fact that relatively few investors are willing and/or able to capture this source of return premia.
The secret, of course, is quite simple: buy low, sell high. Duh! Obvious, particularly in retrospect. But this simple strategy is riddled with complication in real time–much of it bound up with our internal wetware. With that in mind, here’s a quick look at where we stand in terms of ETFs representing the major asset classes in recent history as of this past Friday. The common theme: everything’s comfortably in the black so far this year. In fact, Friday’s prices for our short list of ETFs show that several funds are just below their 52-week high, according to Morningstar.com. Time to take some profits, if only on the margins? Hmmm….
US STOCKS • Vanguard Total Market (VTI) • Benchmark: MSCI US Broad Market Index
FOREIGN DEVELOPED MARKET STOCKS • Vanguard Europe Pacific (VEA) • Benchmark: MSCI EAFE
EMERGING MARKET STOCKS • Vanguard Emerging Markets (VWO) • Benchmark: MSCI Emerging Market
US BONDS • Vanguard Total Bond Market (BND) • Benchmark: Barclays US Aggregate
INFLATION-INDEXED US TREASURIES • iShares Barclays TIPS Bond (TIP) • Benchmark: Barclays US TIPS
HIGH YIELD BONDS • SPDR Barclays High Yield Bond (JNK) • Benchmark: Barclays High Yield Very Liquid
COMMODITIES • iPath Dow Jones-UBS Commodity (DJP) • Benchmark: DJ-UBS Commodity
REAL ESTATE INVESTMENT TRUSTS • Vanguard REIT (VNQ) • Benchmark: MSCI US REIT
FOREIGN DEVELOPED MARKET GOVERNMENT BONDS • SPDR Barclays Int’l Treasury (BWX) •
Benchmark: Barclays Global Treasury ex-US Capped
EMERGING MARKET GOVERNMENT BONDS • Van Eck Market Vectors Emg Mkt Local Currency Bond (EMLC) •
Benchmark: J.P. Morgan GBI-EMG Core
FOREIGN GOVERNMENT INFLATION-LINKED BONDS • SPDR DB International Inflation-Protected Bond (WIP) •
Benchmark: DB Global Government ex-US Inflation-Linked Bond Capped