Early on in his book Unconventional Success: A Fundamental Approach to Personal Investment, David Swensen talks about market timing and asset allocation. His words reinforce how we feel about the topic.

After writing about how market timing has had little impact on returns for institutional investors, he says “the story differs for individual investors. The available evidence points to a pattern of excessive allocation to recent strong performers offset by inadequate allocation to recent weak performers.” He goes on to say that investors can find themselves in this situation either actively (performance chasing) or passively (asset mix drift). The latter is more common. It happens when investors are reluctant to trim or sell something that has been good to them and find it hard to buy an asset that has been a laggard and nobody is focusing on.

David Swensen: “Overweighting assets that produced strong past performance and underweighting assets that produced weak past performance provides a poor recipe for pleasing prospective results.”

His comments are particularly timely right now as rising commodity stocks and the Canadian dollar are giving investors lots of positive reinforcement as to why they own domestic securities. But if your portfolio is overwhelmingly tilted towards Canada, it is a good time to do some rebalancing towards foreign markets. With the strong loonie, the same amount of money will buy you more shares in Nokia, Intel, Citigroup or any foreign equity mutual fund than it would have a couple of months ago. In Canadian dollar terms, foreign shares have been marked down.

If you have already started the rebalancing process and are frustrated with the early results, it’s not time to lose your nerve. Rather, it’s a great time to take another step in that direction.