You’re in Balance! But Are Your Investments?

Twist and turns… Up and down… The investment markets are going through another wild year—fortunately, this time, the volatility is generally in a positive direction. But the dramatic swing in stock returns after three bear years, along with dramatic swings in some other types of assets, raises a few questions for all investors. Is my portfolio balanced?

Rebalancing a portfolio must be done at least once a year. It involves periodically readjusting your mix of assets. Smart Savvy Ladies start by establishing an initial asset allocation, assigning percentages of the portfolio to assets such as stocks, bonds and cash, and perhaps other types of investments such as real estate and commodities. The allocations are further broken down by subcategories, such as different types of stocks and bonds.

The target allocations should be appropriate for that Savvy Lady’s investment goals and financial circumstances, as well as comfort level with certain types of investments. A Savvy Lady with no children and nearing retirement, will likely have a different asset mix than a Savvy Lady right out of college in her early accumulation years.

Why rebalance just because a portfolio no longer matches its original allocation? Why not just let it ride—especially if the market’s going up? Because if you don’t, you increase the risk that you won’t achieve your investment goals! Say you had 55 percent in stocks and 45 percent in bonds in the early 1990s. Unless you rebalanced along the way, by the end of 1999, that mix might have become “unbalanced”—say, 80 percent in stocks and only 20 percent in bonds.

You know what happened next. This stock-heavy portfolio, (especially if it was loaded of tech stocks) suffered more when the stock market declined drastically over the next three years than it would have had it maintained its original 60/40 balance through periodic rebalancing.

How much to allow a specific asset category to shift before readjusting it is up to you, but a common guideline is five percent. To rebalance, consider directing future investment funds into those underrepresented categories until it’s back in balance. You also can readjust by selling off some of the overrepresented assets (the winners) and buying the underrepresented (the losers)—selling high and buying low. Savvy Ladies always sell high and buy low!