Is it Time to Rebalance Your Stocks by Sector?
Regular rebalancing of the assets in your portfolio is part of "long-term investing 101." But if you're the type to rebalance your sector allocations within your stock or equity ETF and index fund holdings, retail brokerage giant Charles Schwab (SCHW) says it's time to start tilting toward more defensive names.
The evidence is piling up that the economy may be slowing down, both in the U.S. and abroad. As CBS MoneyWatch.com's Mark Thoma says, the news, from unemployment claims to pending home sales to GDP (among other data) have been pretty disappointing lately.
The debt crisis in Europe, which was always lurking in the back of traders' febrile brains, has also come back to spook the markets. Ireland and Greece continue to weigh on the euro, lifting the dollar (slightly) and making U.S. exports more expensive. Growth in the U.K. doesn't look so hot either. That's another factor playing on traders' anxieties.
Technically speaking, things have been a bit scary, too, as the S&P 500 keeps breeching its 50-day moving average, something chart-watchers don't like one bit. Some of them say we're poised for a significant pullback.
As I wrote recently, long-term investors are wise to relax when the market gets hinky in this way. But in your gambling portfolio, Schwab suggests you lean a bit more toward sector ETFs, index funds or stocks that tend to hold up better when Mr. Market gets in one of his moods.
"For those who are looking for short-term, tactical moves within a diversified equity portfolio," writes Schwab analyst Brad Sorensen, it's time to take "a slightly more defensive stance with our sector recommendations."
Essentially it boils down to relative rebalancing. Sorensen thinks the health-care sector is more likely to do better than the broader market in the nearer term, while materials stocks are likely to cool off and do worse than the S&P 500, whichever way it goes.
In the language of the Street, this means the analyst expects health care to "outperform" and materials to "underperform." (In other words, better to won Johnson & Johnson (JNJ) than Alcoa (AA).)
For sector ETF and index fund nerds -- or those who like to build the equity part of their portfolios on a stock-by-stock basis -- this chart shows Schwab's current views on the 10 major sectors of the S&P 500 and Wilshire 5000. (As well as those sectors' actual weightings within their respective indexes.)
Before you go ringing up your broker, recall what I quoted from Sorensen above: These recommendations are for "those who are looking for short-term, tactical moves within a diversified equity portfolio." Not to mention that some savvy investors consider such crystal-ball conclusions to be a contrarian indicator -- whatever the analysts say to avoid, they buy.
There is such a thing as too much rebalancing, which only serves to rack up your fees. Besides, you can't daytrade a 401(k) even if you wanted to.
Image courtesy of flickr user Katrina.Tuliao, CC 2.0
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