You don’t have to do anything now–but come January 2018, if 2017 finishes the way I outlined in my last post on this momentum market and end of the year selling/window dressing I think rebalancing a portfolio will be a very smart way to begin 2018.
Rebalancing–selling winning positions and adding to losing positions until all the holdings in a portfolio are equally weighted–will automatically take profits in the biggest winners of 2017 and redistribute some of that cash into stocks that have been sold down in 2017 but that look set to rebound in 2018. Mind you, this rebalancing assumes that those stocks in your portfolio that have given up big ground in 2017 are still fundamentally strong. All you got wrong about them was timing or market fashion or something equally ephemeral. Rebalancing will put money into these stocks in time for a come back as investors discover the lasting fundamental values that you discovered–but too early. Rebalancing after a year like 2017 works like the time-tested Dogs of the Dow strategy–for your portfolio.
After years of trying to figure out how to report the performance of my long-term 50 Stocks Portfolio and my Dividend Portfolio I hit upon a January rebalancing as the best way to make these portfolios most useful to readers of my sites. A rebalancing makes it easier to tell where you want to put money now. So I’ll be rebalancing both of those portfolios as well as my Volatility Portfolio in January 2018.
Before then, I’ve got a job ahead of me (and so do you if you want to rebalance your own portfolio.) You don’t want to rebalance into bad stocks where the price is down because something has gone wrong with fundamentals at the company. That job is to go through my portfolios subject to rebalancing to weed out any of the losers of 2017 I don’t want to put new money into for 2018. (That’s what rebalancing amounts to–you’re putting new money into beaten down shares to bring them up to the average position size in the portfolio.) I’ll be posting any portfolio deletions that are the result of my review over the next few weeks.
I can think of years when I would look on rebalancing with a skeptical eye. Perhaps the trend that had driven the market in the prior year looked likely to strengthen in the next year, for example, so I want to let winners run for a while without any selling. But I don’t have any of the usual compunctions about rebalancing as I look back at 2017 and forward at 2018. I expect fairly significant sector rotation in the new year as some of the trend of 2017 look like they’re nearly priced into the market.