Right now, for example, based on 2015’s results, a rebalance would involve selling large stocks in the U.S. (S&P 500) and developed markets like Europe and Japan (MSCI EAFE), along with U.S. bonds, and buying into small U.S. stocks, emerging markets (MSCI EMNR), and commodities (S&P GSCI).
This might seem scary on the face of it, but that’s kind of the point. Comfortable assets get expensive. Scary assets are cheap because no one wants to own them.
Which brings us back to the psychological challenges of diversification and rebalancing. Yes, it seems to defy logic. Yes, you don’t really want to do it. And yes, results are not guaranteed on a year-to-year basis. It is hard to do.
In fact, the only real argument for doing it is that, over time, it can work.
Brad McMillan is the chief investment officer at Commonwealth Financial Network, the nation’s largest privately held independent broker/dealer-RIA. He is the primary spokesperson for Commonwealth’s investment divisions. This post originally appeared on The Independent Market Observer, a daily blog authored by McMillan.