A recent Morningstar article underscores the importance of rebalancing portfolios during a bear market.
Here are some highlights:
- During a bear market, a buy-and-hold portfolio will see the equity allocation shrink much faster than the bond allocation—the opposite of what happens during a bull market.
- “Rebalancing– or selling a portfolio’s best performers to buy the worst performers periodically– is one of the best ways to protect against market movements altering a portfolio’s risk profile.”
- The advantages of rebalancing are particularly important in tax-advantaged accounts such as IRAs or 401(K)s.
- Rebalancing amid volatile market conditions can be scary proposition for investors, but historically it has helped portfolios rebound more quickly when markets eventually turn around. The article offers data to illustrate the point:
- “The most relevant part of this historical analysis for investors today is the longer recovery periods faced by the portfolios that didn’t rebalance when things finally did start to turn around. This is because in both prior periods, the buy-and-hold portfolio entered the recovery phase with a lower allocation to stocks than the portfolio that regularly rebalanced while having to climb out of a deeper hole.”