A Quick Example Of Rebalancing Theory At Work

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Includes: VNQ, VPU
by: ETF Monkey

I know I go on and on about disciplined rebalancing. In this article, I also address the concept that each asset class in your portfolio can be viewed as a form of "currency," and can be expensive or cheap.

Today, I merely wanted to share a quick real-world example of how this worked in my personal portfolio. The picture below is a 6-month graph from Yahoo Finance. The blue line represents the Vanguard REIT Index ETF (NYSEARCA:VNQ), the red line the Vanguard Utilities ETF (NYSEARCA:VPU) and the green line the S&P 500 average.

Click to enlarge

You will quickly notice that both VNQ and, even more dramatically, VPU have outperformed the S&P. As a result, the "overweight" indicator recently flashed up for both of them in my portfolio, to the tune of about 7-8% overweight. The red arrows represent my two recent sales to bring them back in line; VNQ on 5/9 and VPU on 5/13.

Want to know a little secret? As I write this, both are now slightly underweight in my portfolio. The sharp drop you see in both at the very end of the graph is because the Fed minutes released today appear to indicate that a June rate hike is back on the table. As a result, all interest-rate-sensitive asset classes took a beating.

So, now I have an opportunity to watch for a chance to possibly buy back in at lower prices. Not because I'm brilliant. Simply because I monitored and acted on my weightings in a disciplined manner.