You’ve undoubtedly heard the term “rebalancing.” It has nothing to do with a highwire act although some in the financial community might say that’s exactly what it is. Rebalancing your portfolio is rather critical and it should be done at least annually so that your financial goals remain intact. I do know that many investors don’t even consider this. In fact, friends and family alike tell me that it’s just too time-consuming and besides, they know little about what it takes to do so. To counter this, I like to offer an example. Here’s one courtesy of my friends at First Investors: Take my friend Fred who has a portfolio of 60 percent domestic stocks and 40 percent bonds. He’s had this for the past five years and now it has an allocation of 69 percent domestic stocks and 31 percent bonds. So, over the five year period, stocks went up by 13.4 percent while bonds increased by 4.5 percent. What does this mean? It means that the portfolio wandered or as they call it in financial circles, “drifted.” So, Fred’s portfolio changed rather dramatically even though he did nothing about it for five years. What this also means is that even what appears to be positive developments can easily toss your entire asset allocation out of balance. This translates to a potential for risk coupled with the fact that your return may not be what you had already envisioned. Therefore, if you’ve had a portfolio just sitting there, you might want to reassess the investment priorities, review the securities, and rebalance if necessary. First of all, conducting an annual review requires you to identify whether any of the changes may require a financial response such as a new investment strategy. This may be true because you may have set up certain financial goals or lifestyle considerations which have now changed. Next, if you knew that every investment in your portfolio would throw off the same return year after year, then what would you need to rebalance? That’s not reality. A portfolio drift such as outlined above, can affect your asset allocation…and all to the negative. Finally, suppose your portfolio does need rebalancing. What can you do? The most cost-efficient way to do this is to change the allocation of future investment contributions. What does that entail? Well, you could continue investing the same amount on a regular basis in an overweighed asset while increasing contributions to underweighted investments until you feel that your target has been reached. Or, you can choose to make a lump-sum investment into the asset class that is underweighted. And, you can always sell existing investments that have become overweighted and use those proceeds to buy shares of assets that are then underweighted. Keep in mind that for the last option, mutual fund investors can usually shift money from one fund to another within a fund group without incurring a sales charge. Of course, you still have to consider any tax consequences. But the bottom line is portfolio maintenance. Don’t be inactive!
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