The stock market had a good year this year. Despite the 2% drop yesterday, the S&P 500 index is up 7.5% since January. When I looked at all the Vanguard index funds, everything is up, except REITs. REITs are Real Estate Investment Trusts, which invest in commercial real estate like office buildings, shopping malls and what not. The Vanguard REIT Index Fund is down 9.8% year to date as of July 24, 2007. Moreover, it’s down 20% from its peak in early February. One of the benefits for investing in REITs is their low correlation with the stock market. This is exactly how diversification is supposed to work. Something goes down when everything else goes up.
I bought more REITs yesterday, specifically the Vanguard REIT ETF (VNQ). I bought more not because I think REITs have hit a bottom, but because they fell out of my rebalancing range. While we all like to buy at the very bottom and sell at the very top, there’s no way to predict either the bottom or the top. I have a rebalancing range for every asset class in my portfolio. If the percentage fluctuates within the range, I do nothing. If it falls below the trigger line I buy more. It’s all mechanical. I don’t try to predict whether it’s going to go down further or it’s going to rebound. What if it drops another 20%? Then I will have to buy more. That’s how rebalancing works. Buy the losers.
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Chuck Fouts says
This is the kind of rebalancing that I can firmly get behind. Using new money to adjust your portfolio keeps you from selling your winners, incurring tax payments, and added fee costs. It also helps you possibly buy into a lagging sector, which you pointed out. Thanks for identifying another possible buy low method.
Me too. I bought more VGSIX on Monday and will be buying more today to re-balance my portfolio.
It’s hard not to buy more when the asset class is up on sale. 🙂
Great stuff. It is refreshing to read someone talking about common sense rebalancing as you describe, and not talking about ridiculous hot stocks/sectors of the day.