Rebalancing

Rebalancing involves taking action to ensure that the current portfolio characteristics match as closely as is practicable the targeted portfolio allocations.

When making incremental commitments or withdraws of funds, sensible investors consider the asset-allocation implications. Allocating new funds to underweight asset classes provides a means by which the portfolio moves closer to target, without creating tax consequences. Similarly, withdrawing funds from overweight asset moves portfolios closer to target. However, in the case of withdraws investors need to consider the tax implications of transactions. In fact, overweight classes frequently contain appreciated securities that may incur tax liability  upon sale, giving investors pause.
In spite of the importance of rebalancing in maintaining appropriate asset-allocation targets, few investors pursue the practice systematically. A recent study of investors in funds managed by TIAA-CREF suggests substantial indifferences to portfolio allocations on the part of the firm's college and university staff participants. The lack of rebalancing activity seems particularly surprising given the character of the investor base. If a well-educated, sophisticated group of investors fails to engage in systematic portfolio rebalancing, the larger population of investors most likely exhibits even more extreme inattention to portfolio allocations.
Contrarian behavior lies at the heart of most successful investment strategies. Unfortunately for investors, human nature craves the positive reinforcement that come form running with the crowd.……Contrarian investment behavior requires shunning the loved and embracing the unloved. Most people do the opposite.

In fact, the world of commerce (as opposed to the world of investment) generally rewards following the trend. …… In the Darwinian world of business, success breeds success.

In the world of investment, failure sows the seeds of future success.

Initiating and maintaining out-of-the-mainstream positions requires great conviction and substantial fortitude.…… In the face of a seemingly overwhelming consensus, successful contrarian investors turn a deaf ear to the blandishments of the multitudes.

Establishing a contrarian position constitutes only half of the battle. Failure awaits the contrarian investor who loses nerve. Suppose an investor initially avoids the flavor of the month. Months become quarters and quarters become years. Ultimately, the weak-kneed contrarian capitulates, buying into the new-era reasoning. Of course, the buy-in comes just as the mania peaks, causing the realization of pain without the offset of gain. Taking a contrarian tack in the absence of the ability to persevere leads to poor results.

Rebalancing represents supremely rational behavior. Maintaining portfolio targets in the face of market moves dictates sale of strong relative performers and purchase of poor relative performers. Stated differently, disciplined rebalancers sell what's hot and buy what's not. Under normal circumstances, rebalancing asks for modest degrees of fortitude. When markets make extreme moves, rebalancing requires substantial amounts of courage.