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Momentum & rebalancing: Clements 7/5 article
Dekorai 07-05-2006, 8:36 AM | Post #178847 | 
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This is an excerpt from Jonathan Clements weekly column on the WSJ posted today:

Staying balanced. The idea is to set target percentages for your various mutual-fund holdings and then to tweak your portfolio every so often, to bring your funds back into line with your target percentages.

To avoid hefty tax bills, any trading is best done inside a retirement account. If you are dealing with a taxable account, you might rebalance by directing dividends and fresh savings to underweighted funds.

How does momentum fit into all this? Say you have earmarked 5% of your stock portfolio for emerging markets. Thereafter, you should look to lighten up when your holdings get above 5% and aim to buy when they fall below. But don't rush to buy and sell, because there's a chance market momentum may carry prices to an extreme. "Buying emerging markets on a 15% or 20% drop might seem like a good idea," says William Bernstein, an investment adviser in North Bend, Ore. "But investors should remember that, for these stocks, this sort of decline is just a baby step. I'd be cautious."

So how often should you rebalance? With major holdings like U.S. stocks, foreign stocks and high-quality U.S. bonds, consider rebalancing whenever your fund holdings get five percentage points above or below your targets, suggests Larry Swedroe, research director at Buckingham Asset Management in St. Louis. For instance, if you have 40% earmarked for bonds, you would rebalance if your bonds got above 45% or fell below 35%.

Meanwhile, for smaller positions in sectors like emerging markets and real-estate investment trusts, Mr. Swedroe recommends a 25% trigger. So if you have 5% targeted for emerging-market stocks, you'd rebalance if emerging markets balloon above 6.25% or fall below 3.75%. "You definitely want to be rebalancing, but you don't want to be doing it too often," Mr. Swedroe says. "You want to let stocks go up a bit before you sell, but not so much that you lose control of risk."


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