Since the bulk of my investments are in index funds, fed regularly by scheduled payments based on a pre-set asset allocation, it probably sounds strange when I express concern about taking profits and shifting my asset allocations. Obviously, rebalancing is essential to maintain appropriate asset allocations according to my plans, but a little over a month ago I performed an action that seemed to fall outside my asset allocation strategy. Jason has requested that I explain and expound upon my actions.

I have been watching my REIT position swell considerably outside the bounds of my asset allocation strategy as the funds I’m invested in have doubled in value (plus dividends) during the 4 years I’ve held them. Since my position has steadily grown due to dollar cost averaging, I haven’t received 100% returns, but my returns over a 4 year period are solid. Since REITs in general have increased in value very consistently, and like bonds this steady increase is at the expense of their yield, and thanks to the small gap between the Fed rate and mortgage interest rates, I believe that REITs are overpriced. As an investor, REITs do not look as attractive as they did 4, 3 and 2 years ago.

I determined that there’s less profit and upside potential in the short term, so I decided to halve my current position to “lock in the profits” gained after 4 years of investment. This brought my current REIT holdings down below my asset allocation allotment, which I think is appropriate. I will let my dollar-cost-averaging contributions steadily restore my REIT investments to the appropriate asset allocation over the next 6 – 9 months. I sold half my REIT position on August 9 and invested instead in an Intermediate Bond fund, believing that Bonds were looking at a further depression in yields over the next 6 – 9 months. In my view, it appeared that over the next 6 – 9 months, Bonds were more attractive than REITs as an investment vehicle, so it seemed logical to shift the proceeds from the REIT sale over into Bonds.

I believe that my methodology was sound, although since I halved my REIT position, the funds I sold have gone up approximately 7% since August 9. However, my Bond position hasn’t done horribly and is up approximately 1.5% and has better dividends. I’m still waiting for the REITs to correct downward, although it’s clear I’m not good at picking tops (and time will tell if I was even correct in determining that a top was immanent).

Once REITs or any other Index corrects by 10% or so in the next 5-6 months, I’ll likely use that as a trigger to shift some of my funds out of Bonds and into this Index.

My strategy is as follows: if any index has shown a sustained up trend over 3 or more years or if any index spikes upward by 15% or more within a 1-2 month period, I’ll consider locking in my profits by shifting 25-50% of my holdings in that index over into Bonds (if conditions look favorable) or into a Money Market fund and re-allocate this money once that index or another drops by 10% or more within a short time period. This should capitalize on the fact that indexes should come into and out of favor, but also shouldn’t move drastically up or down. When an index has been consistently rising or falling or in the short term spikes up or down, I’d like to position my asset allocation to capture these profit opportunities.