Another Way to Rebalance

I recently wrote about the rebalancing of portfolios -- a surprisingly tricky topic, with persuasive arguments on both sides. I then heard from a thoughtful reader named Robert, who offered yet another take. Robert said:

Most (almost all) of my portfolio is retirement funding (401(k), IRA).  Since I'm not yet retired, I put more money into the portfolio each year ... I "rebalance" not by selling anything that is doing really well, but instead by investing my new money into investments that should do well, in the asset classes which are "low." Over time this should rebalance my portfolio with one exception -- if any stock really takes off and explodes on me, then my new money may not be enough to counter-balance the value increase from that stock. However, in that case the stock is making more money than rebalancing would.

In other words, when it's time for Robert to contribute more into his growing nest egg, he takes some time to consider which market segments he thinks will do best in the near future. Then he focuses his new money on those areas.

If you were implementing this strategy today, and had been investing in some emerging-market funds, you might switch instead to developed economies or domestic stocks. As Michael Krause recently noted at seekingalpha.com, emerging markets have done so well that they're now trading at higher P/E multiples than markets of developed countries.

Caution, though
Robert's strategy has merit, but be careful. Some expected winners take a long time to deliver. Some winning streaks can go on longer than expected. His approach involves considerable guessing -- though admittedly, so does much of investing in general.

Meanwhile, consider including some exchange-traded funds (such as those mentioned above) in your portfolio, since they can provide an easy way to diversify your holdings. The iShares MSCI EAFE ETF (NYSE: EFA  ) , for example, offers a simple way to be invested in some 800 global companies in one fell swoop -- firms such as Britain's Vodafone (NYSE: VOD  ) , HSBC Holdings (NYSE: HBC  ) , and GlaxoSmithKline (NYSE: GSK  ) ; Finnish telecom Nokia (NYSE: NOK  ) ; and Japanese automaker Toyota (NYSE: TM  ) . 

Our ETF Center has the skinny on these popular investing vehicles, which offer some valuable advantages over traditional mutual funds. Check it out!


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