Rebalancing – Taking Chips off the Table

The market rally since March has been a nice bounce off the lows from last year’s credit crisis and market crash. Even though economic data shows that both the U.S. and global economy are gradually recovering, we are beginning to trim some of our positions that have performed the strongest during this rally. We believe the market will take a step back at which time we will gradually add back positions that will benefit from the slow but eventual economic recovery. Here is a rundown of what to expect.

Over the past two weeks we have trimmed our overweight positions in Emerging Markets and Emerging Asia Pacific. As expected, these areas led the market recovery with 40-50% gains during the year. We still believe these positions will remain important core long-term allocations, but we see better opportunities in the market and valuations have become stretched in these areas.

When the market pullback gives us opportunity, we will be adding to both Domestic and Foreign Small and Mid-Cap stock funds. Small and Mid-Cap stocks typically are stock market leaders in the early stages of an economic recovery and we want to move back to a more normal allocation in these areas.

We will also be adding more to our Value style stock funds. We did a great job avoiding these during the credit crisis because of their exposure to banking and financial stocks. In the next stage of the market we need to have exposure to high quality, value stocks. In addition, we will be slightly pruning back our positions in corporate bonds and corporate high yield bonds, which have also experienced equity like returns in recent months.

While rebalancing, we will have increased our mix of active fund managers from 50% to 75% of the total portfolios. We think having more active managers will help us in the next phase of the recovery.

An economic recovery appears to be taking hold, and we have had a nice rebound in the stock markets. Going forward the recovery will be slow and bumpy, market gains will be more moderate, and we will be ready for it!