Is the Market giving you a re-balancing opportunity?

by Wayne Ferbert on March 20th, 2013

The market rally since the post-election lows has been impressive. The market initially sold off after the election and reached its low close on November 15, 2012. Since then, the US Equity market has been in a full on rally. Even some international markets have rallied along with the US market.
 
Look at the chart below. The small cap space has been the biggest winner with the IWM etf up about 22% followed by the mid-cap etf (symbol: MDY) up 20%. The S&P 500 is up 14% (symbol: SPY). Even the developed international markets etf (EFA) is up almost 14%. The only laggard on this chart is the Emerging markets ETF (EEM) which is only up about 5%.
None of these returns include dividends so the real returns are even a little better. These are the ETFs we recommend in your Buy & Hedge portfolio for representing your equity exposure. It has been a nice run – but there is at least one example of a significant divergence in returns.
 
Since January 1st, the emerging markets ETF has been on a solid run downward. It is down almost 5% after growing nicely in the latter half of 2012. It was up 14% in the 2nd half of 2012 while these other US equity players did not rally much in the 2nd half of 2012 until the last few weeks of it.
 
So, the market might be giving you a nice chance to re-balance your portfolio with an obvious sell high candidate (MDY & IWM) and a nice buy on the dip candidate (EEM). If you haven’t rebalanced recently, look at your portfolio to see if the combined MDY and IWM are more than 3% higher in target allocation than your original plan/design. Next, look to see if the EEM position is under-allocated at this point. If both of these things are true, look to sell some of the MDY and/or IWM and put it in to the EEM position.
 
If you have already rebalanced in the last 6 months, then you should only look to do it again if your positions are even more out of balance than 3%. Maybe use a target of 6% over allocated in the MDY/IWM category.
 
We always like opportunities to re-balance that are smart and make sense. These kind of chances are our favorite: sell a position in to a rally (MDY & IWM) and re-invest on a dip (EEM).
 
Make sure to check your portfolio for this opportunity. 


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