Monday, April 30, 2007

When To Rebalance Ones Portfolio As Large Cap Stocks Receive More Favorable Press

As a follow up to my Friday post, Large Capitalization Stocks Poised To Move Higher?, today the Wall Street Journal had an article, Goliaths Gain Momentum on Davids($), on the out performance of large cap stocks during the month of April relative to small cap stocks.

On a year-to-date basis, the Dow Jones Industrial Average (large cap stocks) and the Russell 2000 Index (small cap stocks) have generated similar returns of a little over 5%. However, for the month of April, the DJIA is up 6.2% versus 3.6% for the Russell 2000 Index. Is it possible a rotation into larger capitalization stocks is underway?

One must remember it is difficult to time the market; however, one should have a discipline of rebalancing their portfolio from time to time. Ideally, one has developed an investment policy statement (at least parameters) outlining acceptable levels of exposure to stocks and bonds. Within stocks the exposure to large, mid and small cap stocks should be evaluated. In reviewing ones portfolio, if they are over exposed to small cap stocks, for example, one should consider reallocating to the under represented asset class. From a comfort standpoint, one will find it difficult to reduce exposure to a winning segment of the market. As the chart details below, though, nearly seven years of out performance of small and mid cap stocks is a long period of time from a historical perspective. Given the market performance over the last 5-7 years, one is likely under exposed to large capitalization stocks. The below chart details the performance disparity between mega cap stocks (S&P 100), large cap (S&P 500), mid cap stocks (S&P 400) and small caps (S&P 600).

(click on chart for larger image)

equity style performance April 2007
Lastly, it is difficult to determine when a particular segment of the market under performs or out performs the other. Many times, in the long run, the best alternative is to invest in high quality dividend paying stocks. As prior posts on this site have noted, dividend growth stocks tend to out perform other asset classes on a risk adjusted basis.

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