So far, 2011 has had plenty of excitement, with big ups and even bigger downs in some markets. But when you look closely at exactly which stocks are moving in which direction, the moves make a lot more sense. More importantly, they should start giving way to more fundamental considerations in the days and weeks to come.
A tale of two markets
Whether 2011 is going well depends on your focus. If you own a broad-based swath of U.S. stocks, then you should generally be pretty happy. The S&P 500 hit another two-year high yesterday, recovering from an early sell-off to post decent gains.
But other investors haven't been so fortunate. Both emerging markets and developed international stocks haven't kept up with gains on domestic stocks, with the Vanguard European ETF
Some commentators have suggested that this spells the imminent end of some major market trends, such as the commodities boom. Yet while I've argued that underperformance in U.S. stocks relative to international equities has been long overdue to change, this week's moves look more like investors making some prudent risk-management decisions about their portfolios. Moreover, some of the moves will end up being short-lived, as the underlying premises behind those long-term trends reassert themselves.
Rebalancing: the smart move
The beginning of the year is a great time for investors to consider rebalancing their portfolios. And looking at some of the hardest-hit stocks this week, many investors have clearly made rebalancing part of their annual rituals.
For instance, among commodity-related stocks, Silver Wheaton
Meanwhile, the stocks that have benefited from the rebalancing trade include some weaker performers from 2010. Health-care stocks have seen some nice gains, with Intuitive Surgical
These rebalancing moves are likely to continue for at least the next few days, as investors continue to maneuver their positions around. But after these short-term moves are done, you can expect to see pressure for long-run trends to regain momentum. It's hard to argue that anything has fundamentally changed just because you have a new calendar on the wall, especially with major policy moves like the extension of tax cuts through 2012.
So if you want to position your portfolio to anticipate the continuation of the trends that have supported commodities and international markets, then this week's weakness in those areas is a great opportunity to do so. But if you discover that your exposure to risk and volatility among your investments has risen because the past year's winners and losers changed your overall asset allocation, then making some rebalancing trades is still the prudent thing to do -- even if prices may have moved against you.
Rebalancing is a smart move on the road to a rich retirement. Read more great retirement tips in the Fool's special report, The 7 Secrets to Salvage Your Retirement Today.
Fool contributor Dan Caplinger loves doing the rebalancing act. He owns shares of Vanguard European ETF. Elan and Intuitive Surgical are Motley Fool Rule Breakers recommendations. Motley Fool Options has recommended a diagonal call position on UnitedHealth Group, which is a Motley Fool Inside Value pick and a Motley Fool Stock Advisor choice. The Fool owns shares of UnitedHealth Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy will keep you in balance.