The financial crisis changed nothing, writes Vanguard's Fran Kinniry: Investors continue to chase returns, and have lately been jettisoning fixed income for stocks. Driven by the 4th greatest bull market on record - a cumulative return of 198% since the bottom - global equity allocation for investors has increased to 57% from 38%, and vs. the 20-year median of 51%.
It's probably time for the typical investor (one with an equity-heavy portfolio) to maintain a prudent allocation by directing new cash flows into bonds, while selling stocks - the exact opposite of where money is flowing today.
"Rebalancing usually seems counterintuitive at the time when it promises to be most effective," says Finniry. "It can be difficult to implement from a behavioral standpoint and requires incredible discipline." With equities partying and the near-universal belief of higher interest rates on the way, who could blame an investor for not wanting to sell stocks and buy bonds.
"It is very common following significant gains in the equity markets for investors to question the benefits of rebalancing," but it's never "different this time;" instead it's the "same as it ever was."