Is a First Half Portfolio Rebalance Worth it?

Things probably haven’t gone as you’d hoped. At the start of the year, investors had plenty of reason to think the stupendous stock-market recovery of 2009 would continue.

It did for a while but, to cut to the chase, the first half of 2010 has been a disappointment, thanks to the faltering economic recovery, worries about the European debt crisis and a raft of other problems.

For many investors, stock-market losses and bond market gains seem to demand a round of portfolio rebalancing, to get the allocation to each type of asset back on target. Then again, in a volatile period, you wonder whether a move from bonds to stocks might have to be quickly undone if conditions change.

Let’s start with a look at the numbers. According to Lipper, the fund-data company, the average diversified U.S. stock mutual fund was down 5.68% from Dec. 31 through July 1. Meanwhile, the average taxable long-term U.S. bond fund was up 4.61%. That sounds like enough to require readjustment.

But would that really throw your portfolio out of kilter?

Assume you rebalanced at the start of the year to make a portfolio 60% stocks, 30% bonds and 10% cash. The entire portfolio would be down about 2%. Your stocks would make up about 57.8% of the portfolio, bonds about 32% and cash, assuming it had held even, about 10.2 percent.

Although your stocks have fallen nearly 5.7%, they still make up nearly 58% of the portfolio, not far off the 60% target. Bonds, too, are only about 2 percentage points off target.