It’s Time to Check Your Allocations
Thursday, October 25, 2012
Charles Rotblut, CFA
AAII Journal Editor

AAII Resources

Best Practices for Portfolio Rebalancing
The optimal triggers for adjusting your allocations.

Portfolio Rebalancing and Withdrawals
Even with withdrawals, rebalancing has benefits.

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Sentiment Survey

This week’s AAII Sentiment Survey results:
  Bullish: 29.2%, up 0.6 points
  Neutral: 27.7%, up 0.9 points
  Bearish: 43.1%, down 1.5 points

Long-term averages:
  Bullish: 39%
  Neutral: 31%
  Bearish: 30%

Take the AAII Sentiment Survey »


The “best six months” for stocks start a week from today. Since the end of World War II, the S&P 500 has historically realized an average return of about 7% between November 1 and April 30, according to Sam Stovall at S&P Capital IQ. Conversely, during the “worst six months,” the S&P has only gained 1.2% between May 1 and October 31.

Though the European sovereign debt crisis, the looming threat of the U.S. fiscal cliff and the close presidential election might have you feeling like it’s different this time, 2012’s worst six months are sticking close to the script, with the S&P 500 gaining 1.1% since April 30 as of today’s (Thursday) close.

Of course, things could gum up the works for the forthcoming “best” six months. A challenged outcome to the presidential election, the lack of a solution to the fiscal cliff (or a negative reaction to a temporary solution) or increased worries about Europe all have the potential to trip stock prices up. Then again, there could be a clear winner in the presidential election and Congress could reach a bipartisan agreement to avoid the fiscal cliff that the market likes, giving stocks a lift. If you can forecast what will happen with certainty, then your crystal ball is better than the cracked one I’m using.

Rather than fretting the “what if” scenarios that could occur, consider using the calendar the way I do—look to see if your portfolio needs rebalancing. Every six months, I look at my allocations to see if they are more than five percentage points away from my targeted allocations. I don’t sweat the small details, such as how my position in Berkshire-Hathaway (BRK.B) compares to my position in Diageo (DEO), but rather how my overall stock allocation compares to my overall bond allocation. If my broad allocations are out of whack, I rebalance. (The only change I recently made was tweaking how my 403(b) contributions are allocated; no rebalancing looked necessary when I reviewed my portfolio statements last week, and I don’t anticipate this changing over the next few days. Your portfolio may be different.)

The rationale for doing this is that I’m using the seasonal trends to my advantage. If stocks have a great six months, rebalancing may prompt me to lock in profits at the end of April. If stocks have a terrible six months, rebalancing may prompt me to buy in November. I’m not trying to time the market, rather I’m simply taking advantage of seasonal odds to buy low and sell high. All things being equal, I’d just as soon have lady luck on my side.

Keep in mind that it is more important that you simply check your allocations on a regular basis and rebalance when needed than trying to optimize the time of year you check. There are many fancy investing strategies that sound like they’ll give you an advantage, but the biggest advantage you can give yourself is being disciplined about sticking to a sensible long-term strategy.

More on AAII.com

The Week Ahead

Approximately 100 members of the S&P 500 will report earnings next week. Included in this group are Dow components Exxon Mobil (XOM) and Chevron Corp. (CVX). The two energy giants will report on Thursday and Friday, respectively.

The week’s first economic report of note will be September personal income and spending, scheduled for release on Monday. Tuesday will feature the August Case-Schiller home price index. The October ADP Employment Report and the October Chicago purchasing managers’ index will be published on Wednesday. Thursday will feature the October ISM manufacturing index and the third-quarter productivity. October employment data—including the unemployment rate and the change in nonfarm payrolls—and September factory orders will be published on Friday.

A few Federal Reserve officials will speak publicly. Minneapolis bank President Narayana Kocherlakota will speak on Tuesday. San Francisco bank President John Williams will speak on Wednesday and Friday. Boston bank President Eric Rosengren and Atlanta bank President Dennis Lockhart will speak on Thursday.

AAII Sentiment Survey

Individual investors became a little less pessimistic in the latest AAII Sentiment Survey, though bearish sentiment remains at unusually high levels.

Bullish sentiment, expectations that stock prices will rise over the next six months, edged up 0.6 percentage points to 29.2%. This is the first time since July 26, 2012, that optimism is below 30% on consecutive weeks. It is also the ninth consecutive week and the 29th out of the last 30 weeks that bullish sentiment is below its historical average of 39%.

Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, rose 0.9 percentage points to 27.7%. This is the first time since March 22, 2012, that neutral sentiment is below 30% on consecutive weeks. The historical average is 31%.

Bearish sentiment, expectations that stock prices will fall over the next six months, declined 1.5 percentage points to 43.1%. This is the first time since July 26, 2012, that pessimism is above 40% on consecutive weeks. It is also the ninth consecutive week and the 25th out of the last 29 weeks that bearish sentiment has been above its historical average of 30%.

Year-to-date, bullish sentiment has averaged 35.9%. This puts bullish sentiment on pace for its lowest average weekly reading since 2008, when optimism averaged 34.1%.

Bearish sentiment remains at unusually, but not extraordinarily, high levels. The recent downside volatility and lackluster third-quarter earnings season is further dampening the moods of those investors who were already concerned about the pace of economic growth, Europe’s sovereign debt problems and the possibility of the fiscal cliff occurring. It is also possible that nervousness about the outcome of the election is having some impact on the results.

This week’s special question asked AAII members if the stock market is presently fairly valued, undervalued or overvalued. Slightly less than half of the respondents said the market was overvalued. The current or expected level of corporate earnings was the primary reason why they thought stocks were too expensive, though many cited the economy, the Federal Reserve's monetary stimulus and the possibility of the fiscal cliff occurring as their rationale. About a third of respondents thought stocks are fairly valued, while acknowledging the potential for downside movement in stock prices. A few respondents cited the outcome of the election as impacting how they viewed valuations.

» Take the sentiment survey

Have a happy (and spooky) Halloween,

Charles Rotblut, CFA
AAII Journal Editor