You’ve heard it before: Stay the course. Don’t sell when your assets are valued at the lowest point.

Is this “do nothing” message always correct? Could it lull you into making a bad decision?

The idea of not making any market moves is based on the assumption that before the bear market started and the recession kicked in, you were rational and had put together a balanced portfolio—diversifying your risks and reflecting your risk tolerance.

For a number of investors, this could be very far from the truth.

I think the question I’d ask myself is whether, a year or so ago, I had allocated my assets to reasonably reflect my investment objectives. If the answer is yes, then “staying the course” seems reasonable. But if it turns out not to be the case, I might now be significantly overweighted in some asset classes, and carrying risk I can’t tolerate.

My considerations here probably should include more than “do nothing.” Faced with this dilemma, what would I do—and how fast?

There’s no easy or painless way to fix an unbalanced portfolio. Would I move existing assets to rebalance? I might. Rebalancing would be my objective—and it makes sense, since I may benefit from tax-loss harvesting.

Shifting contributions in my 401(k) will start to rectify the situation, but, short of a substantial infusion of new dollars, it might take a while to make a difference—as would reinvesting dividends in other asset classes to increase diversification.

Getting into a situation like this generally doesn’t occur overnight, and getting out of it could take some time. This time around, I think I’d put a plan together before I made a major move.


Investments are subject to risk. Diversification does not ensure a profit or protect against a loss in a declining market. Consider consulting a tax advisor about your individual situation.

We invite your comments on this Vanguard Blog entry. Comments will be monitored and published at Vanguard’s discretion. Comments received prior to July 7, 2009 will not be published.