Jane Bryant Quinn—Rebalancing Portfolio May Cushion Market Downturn

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So you thought stocks were safe? So did everyone who studied the long-term history of Standard & Poor’s 500 stock index. That’s the basis of most stock-market price studies and most investor myths. True, over five-year periods, S & P; stocks lose value just 10 percent of the time. Over 10-year periods, it’s more like 3 percent.

But that’s not zero percent, so stocks aren’t safe. Just because something is unlikely doesn’t mean it’s not going to happen. Our generation could be among the unlucky 10 percent.

Besides, today’s unhappiest investors aren’t in the S & P; stocks. They’re in dot-coms, tech stocks or growth mutual funds that concentrated in tech, and are currently down 40 percent or more.

You cannot study the price history of the companies in the S & P; and imagine that it applies to speculative investments or stocks with super-high price/earnings ratios.

Such investments sometimes produce terrific returns (as in recent years) and sometimes poop out.

What’s more, you can’t take the price history of the market in general and apply it to individual stocks. The market usually rises over the long run. But individual companies can fail or lag the market for 30 years.

Zenith, a shining tech stock in its day, wound up in bankruptcy. So did Wang Labs. RCA, the most exciting wireless-communications company of the 1920s, never recovered from the crash of 1929.


Buy and hold

What’s the outlook for Yahoo or Amazon today? People who bought near the top could hold these stocks half a lifetime and never see that price again.

Investors who currently hold losers may assume they’ll eventually make money because they’re “holding for the long run.” But if that theory always worked, buggy-whip stocks would be doing as well as Philip Morris.

Buy-and-hold investors have a good shot at making money over the long run if they buy the stock market as a whole. That means buying an index mutual fund that tracks broad market performance.

Good examples would be Vanguard’s Total Market Fund or Schwab’s Total Stock Market Index Fund. Both track the average price of large and smaller U.S. stocks. You get the long-run performance of the U.S. economy as a whole.

Most investors think they can buy mutual funds that will beat the market average. And indeed, in every time period, some funds succeed.

What you don’t notice is that funds succeed at different times. You can’t know in advance which ones will do well over your particular holding period.

Another investment truism forgotten in recent years is that careful investors “rebalance” their portfolios.

The more money you allocate to stocks, the higher the total return you can hope for but the greater your risk of loss. To control that risk, you rebalance meaning that you sell some high-performing investments and put the proceeds somewhere else.

As your techs and dot-coms advanced last year, your total portfolio was getting riskier. But you were doing so well, you probably didn’t want to take any money off the table.


Selling winners

Alas. You’d be a lot richer today if you’d gradually sold some of those stocks over the year and stashed the proceeds in bonds or cash.

You didn’t even have to switch to cash. You could have sold tech funds and switched to funds that included Old Economy stocks. Historically, moving money out of leading stocks and into laggards works very well even if it doesn’t look that way at the time.

It’s hard to sell winners, but you don’t have to sell completely. If you have 500 shares, sell 100 of them. Next month sell another 100.

That’s not only a good rebalancing strategy, from a price point of view. It also helps you get over the emotional hurdle of selling an investment you’ve loved (including, perhaps, an over-investment in your own company’s stock).

You should buy stocks gradually, too. If you think, as I do, that cuts in interest rates will restart growth, then corporate profits should improve next year. In anticipation, stocks will rise.

But we don’t know when the bear market will end for sure. By investing cash gradually, you’re averaging into what might be the bottom.

Syndicated columnist Jane Bryant Quinn can be reached in care of the Washington Post Writers Group, 1150 15th St., Washington, D.C. 20071-9200.

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