The Advantages of Diversification and Rebalancing
Diversification and regular portfolio rebalancing provide measurable benefits to investors. This statement holds true even though the last decade bought two bear markets for stocks and the outlook for the future is currently anything but certain.
I realize that saying diversification and rebalancing help may surprise some of you. The roller-coaster ride stocks have been on and the portfolio devastation experienced by many investors has created a great deal of skepticism about whether the cornerstones of portfolio management still work. Yet the data shows that they do in fact work.
To prove this point, last December I created a simple portfolio consisting of $50,000 in the Vanguard 500 Index (VFINX) and $50,000 in the Vanguard Total Bond Market Index (VBMFX) mutual funds. I ran the numbers as if the portfolios had been held during the “lost decade” of 2000 – 2009. As some of you may remember from my commentary in our weekly AAII Investor Update e-newsletter on December 16, 2010, there was an advantage to annual rebalancing.
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