The start of the final quarter of the year means it's time for portfolio rebalancing — but you better know how to do it. And it doesn't mean simply selling winners and buying losers. Rebalancing is an act that can bring out the best — and worst — from investors. A presidential election and Federal Reserve on the verge of an important interest rate hike before year-end may make the rebalancing act even trickier than it usually is.
As the year winds down many investors will sell investments that have posted big gains and buy those that seem poised for future growth, or maybe because they appear as relative bargains based on recent underperformance. Consider energy, leading the way among S&P 500 sectors, up more than 20 percent. Energy seems like the perfect example of why a beaten-down sector is the right buy at year-end: in 2015, the energy sector was down by 21 percent.
But Larry Swedroe, director of research at financial advisory network BAM Alliance, cautioned against trying to beat the market with a sector rotation strategy. "There is no evidence that investors are likely to benefit from sector rotation strategies," he said. "If it was true then we would see active managers persistently outperforming. But not only is that not the case but the evidence is that fewer and fewer active investors are beating their appropriate risk-adjusted benchmarks every year."
"Trying to do this stuff is playing what [Charles Ellis, founder of Greenwich Associates and author of "Winning the Loser's Game"] Ellis called the 'Loser's Game,' meaning it was possible to win but the odds of succeeding were so low that it's a fool's game," he added.