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The
Importance of Rebalancing
April 24, 2002
After an unprecedented five year winning streak for large-cap growth stocks that
ran from 1995-1999 (measured by S&P/Barra 500 Growth Index), a majority of
investors simply held onto their positions, enjoying the impressive gains and
hoping they would go on forever. Unfortunately, the experience turned painful
when the bull market ended abruptly in the first quarter of 2000. As we’ve
talked about in the past, many investors who did not rebalance their portfolios
became increasingly growth oriented and suffered the most through the decline.
Investors
caught in this momentum trap were not alone. History shows that there have
always been periods when certain asset classes or investment styles were in
favor, then quickly dropped from favor.
The
flavor of the day is Small Cap Value. Beginning in 2000 and carrying through the
current year, the Russell 2000 Small Cap Value Index has done well, averaging a
21% annual return. As for the rest of market, well it pales by comparison. We
could be at the beginning of a long winning streak for small cap stocks – only
time will tell. But, after two fantastic years, it is prudent to review
portfolios. This ensures that the allocations are not over-weighted by any style,
thus preventing exposure to undue style risk.
Few
people have the experience, ability or luck to accurately predict fundamental
changes in the market. A well-diversified portfolio will typically weather
market upheaval over the long term better than a portfolio overly concentrated
in one area of the market. Given the sometimes drastic difference in performance
between asset classes, it is crucial to rebalance a portfolio on a regular basis
in order to ensure that the portfolio allocation stays in balance and in check.
The
Christy Investment Group offers a disciplined and periodic rebalancing of our
client portfolios. We closely monitor and evaluate each account for variance
beyond pre-specified limits of the target allocation. Accounts are first marked
for review and after consultation with the client in which consideration is
given for client needs, manager constraints and tax implications is the account
rebalanced to the target weighting.
R. A.
Christy
This is NOT a
market forecast or investment recommendation of any type. Clients should not
rely solely on this information to make investment decisions. The Russell 2000
Index is an unmanaged market capitalization-weighted index of 2,000 small
company stocks. The S&P Barra Growth Index is an unmanaged capitalization
weighted index of all stocks in the S&P 500 that have high price to book
ratios. Approximately 50% of the market capitalization of the S&P index is
reflected in the S&P Barra Growth Index. The performance of an unmanaged
index is not indicative of the performance of any particular investment.
Individuals cannot invest directly in any index. Past performance is never a
guarantee of future results. Investments offering the potential for higher rates
of return also involve a higher degree of risk. Actual results will vary.
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