Published Friday, January 5, 2018 at: 7:00 AM EST
2017 was a mirror image of 2016 and vividly illustrates how portfolio theory worked in the real world last year.
The top performing types of U.S. stocks in 2016 were the biggest laggards in 2017. Meanwhile, the worst-performing types of U.S. stocks in 2016 were the biggest winners in 2017.
Portfolio theory says the way to manage this rotation is to rebalance. At the end of 2016, for example, rebalancing would have meant lightening up proportionately on the most appreciated types of assets (i.e., small-cap value stocks) and buying more of the types of assets that lagged (i.e. S&P 500 large-cap growth stocks). The exact amount of each type of asset is set based on your personal preferences.
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