A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing

by Burton G. Malkiel

What kind of alchemy permitted the investor who followed a rebalancing strategy at the end of each year to increase her rate of return? Think back to what was happening to the stock market over this period. By late 1999, the stock market had experienced an unprecedented bubble and equity values soared. The investor who rebalanced had no idea that the top of the market was near, but she did see that the equity portion of the portfolio had soared far above her 60 percent target. Thus, she sold enough equities (and bought enough bonds) to restore the original mix. Then, in late 2002, at just about the bottom of the bear market for stocks (and after a strong positive market for bonds), she found that the equity share was well below 60 percent and the bond share was well above 40 percent, and she rebalanced into stocks. Again, at the end of 2008, when stocks had plummeted and bonds had risen, she sold bonds and bought stocks. We all wish that we had a little genie who could reliably tell us to “buy low and sell high.” Systematic rebalancing is the closest analogue we have.