This post will be broken up into two parts.

Rebalancing a Portfolio

I have a quick question about rebalancing a portfolio.

I know there are traditional portfolios and traditional ways of rebalancing them. To set up a traditional portfolio, you basically buy certain percentages of various asset classes, including domestic stocks, foreign stocks, commodities, bonds, etc… You base the percentages on your risk tolerance. You diversify into different asset classes to get the see-saw effect…when equities go up, bonds go down. Something like that. As market conditions and your portfolio allocations change, you rebalance the portfolio. Basically, you sell high and buy low. In theory, it works quite nicely.

So, here’s my question – Say someone is interested in moving away from asset classes (for reasons I will mention below) and setting up a portfolio in, say, currency ETFs. Say that person finds a few currency ETFs that move inversely with one another. Say those currency ETFs move relative to one another as well (the way the forex market does). Do you think it’s a wise investment decision to buy percentages of those ETFs and continuously rebalance them as they move away from their targets? This would be basically the same exact process as rebalancing a traditional portfolio. The way I see it, these ETFs are operating in true see-saw action.

Which brings me to the next part of this post…

Asset Classes Moving Together

I read an article a few days ago that described a problem facing those with a portfolio diversified into asset classes. The article said that since so many people are jumping on this asset class / rebalancing bandwagon and because of the market turmoil and unpredictability, various asset classes are now moving in lockstep with one another. Here is an article that describes it better than I can. It talks about correlation coefficients and stuff like that.

So what’s a person to do? Long term investors tell you to sit there and be patient. They are probably right. This is when people make real money…when there is turmoil and everyone is freaking out. Just continue to add to your investments and rebalance accordingly. I am in that camp. I mean, how many times have we seen the end of the world coming and then watch those people who stayed calm come out on top? Happens all the time.

So anyway, if you have any thoughts on these two topics, please leave a comment.

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