Rebalancing now may be wise, and consider technology funds

Your Funds

Dollars & Sense

April 08, 2001|By CHARLES JAFFE

YOUR emotions may tell you to avoid technology right now, but your portfolio probably is saying something completely different.

The huge losses suffered by the technology sector in the last 15 months have significantly altered the holdings of many average investors. Not only do they feel the pain of losses topping 60 percent in tech funds, but those very losses have thrown portfolios out of balance.

Investment portfolios that were technology-heavy in 1999 may well be technology-light today. That could generate a buy signal for investors who "rebalance" their portfolios.

Rebalancing is a strategy that is designed to keep your portfolio in line with your asset allocation plan. Typically, it involves pulling back on leading market sectors and investing in laggards, so that your portfolio stays true to your strategy.

Right now, however, it means harvesting winners to invest in big losers.That can be mighty uncomfortable.

"It is scary to rebalance into an area that is dropping like a rock, but you have to realize that the people who rebalanced their holdings in 1999 - when they were buying into Old Economy sectors like energy or when they were buying bonds - saved their hide when the tech market crashed," says Russ Kinnel, director of fund analysis at Morningstar Inc. "The people who piled more and more into their winners in 1999 are the ones who are now looking at downsizing their life.

"The fact that it isn't easy is a big part of what makes it worth doing every year or so."

Let's see why rebalancing may be appropriate now, and why it might entail buying tech funds.

Say an investor started 2000 hoping to maintain a portfolio that was 50 percent growth funds, 30 percent bond funds, and 20 percent technology funds. (Obviously, the growth funds will have some stake in technology, but we'll assume it's not excessive.) Say $100,000 is put into this asset allocation.

Fifteen months later, assuming the average return for each fund category, the growth stake has fallen about 35 percent to about $32,500, the bonds are up about 10 percent to $33,000 and the tech stake is down 70 percent to $6,000.

In short, the portfolio is now roughly 45 percent growth funds, 46 percent bonds, and 9 percent technology.

Recapturing the original asset allocation means pulling money from the bond funds to rebuild the growth and tech positions. (To avoid selling winners for tax reasons, rebalance by directing new money to the lightweight parts of the portfolio.) Now plug in your current portfolio and your ideal asset allocation.

Chances are, you have less tech exposure than you expect, due to the market slide, and rebalancing is called for.

In effect, rebalancing is a "value" investment strategy, where you try to buy into the undervalued portions of the market. It is the classic example of selling high (by culling winners) and buying low (by investing in laggards).

The decline in the tech market has turned what had been high-flying growth stocks a year ago into value issues today (while not necessarily underpriced, some tech stocks are getting close). At the same time, some of those stodgy Old Economy stocks are now the ones that constitute "growth" investments.

"You're not making wholesale changes where you completely switch strategies," explains William G. Markos of Ipswich (Mass.) Investment Management. "But if you had a good strategy and you want to stick with it, you have to rebalance, even if that means buying things that make you nervous."

Markos highlights the key issue in rebalancing: It's a tweak of your portfolio, not an overhaul. The idea is to reposition bits of money - generally not more than 10 percent of the portfolio if you rebalance every 12 to 18 months - rather than to revamp your strategy.

There's no market call involved, no attempt to time the bottom of the market in order to grab a rebound. You're simply sticking with an asset allocation plan you believe in.

That last part - about believing in your strategy - is crucial.

Some investors went heavy into technology because that was where all the profits were, and they started 2000 with portfolios that were 70 percent or more into one asset class. Their portfolios imploded once the tech market hit the skids.

If your portfolio never had balance in the first place, consider changing strategies.

"This is a great time to rebalance - because most people probably need it - but it's not necessarily the best time to review your portfolio strategy," says Kurt Brouwer of Brouwer & Janachowski, a Tiburon, Calif., investment advisory firm.

"When you have suffered the kinds of losses we have seen over the last year, it's very easy to say `I made a mistake,' and then to overreact in correcting it."

Chuck Jaffe is mutual funds columnist at the Boston Globe. He can be reached by e-mail at jaffe@globe.com or at the Boston Globe, Box 2378, Boston, Mass. 02107-2378.

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