When Jasmine and Ronaldo wrote to me requesting a Portfolio Makeover in mid-2009, they were still reeling from the shock of the bear market. Having watched the value of their retirement portfolio drop by more than a third, the couple, both in their early forties, were having a crisis of confidence. They had only just begun investing in earnest for retirement, and they had used multiple sources of information to help them select an asset mix that was appropriate for their time horizon. Following the downturn, their stock holdings were just a shadow of their former selves, but the couple hadn't taken steps to add to them—or made any changes at all—in the wake of the decline. Jasmine put it succinctly when she said: "We're worried about throwing good money after bad."
This couple's hesitation is common. If an investment type has inflicted big losses on your portfolio, it's natural to question the wisdom of holding it at all, let alone adding to it. But that's what rebalancing—the process of putting your portfolio's allocations back in line with your targets—requires you to do. Given how counterintuitive and psychologically difficult rebalancing is, it's really no wonder so many investors forgo it altogether.
That's a shame, because employing a rebalancing program is one of the best ways to improve your portfolio's return and lower its risk level.
Let's say that you put $10,000 in Dodge & Cox Income DODIX (a bond fund) and $10,000 in Dodge & Cox Stock ...