Web Wealth: Rebalance your portfolio
Your investing goals can change over time. And, investments you picked a decade ago won't all be performing as you hoped. That's why you need to rebalance a portfolio every year or so. Here's how.
Your investing goals can change over time. And, investments you picked a decade ago won't all be performing as you hoped. That's why you need to rebalance a portfolio every year or so. Here's how.
Doing the unnatural. Morningstar.com explains how important rebalancing is, even if it feels "unnatural" to do so. This short online course provides the reasons behind rebalancing, and then tells how to go about it at least annually by determining which of your investments may be out of whack and then reallocating funds to maintain a healthy stock/bond split. Remember to consider the tax implications of any moves you make.
Beginners guide. The Securities and Exchange Commission has a beginners guide to asset allocation, diversification, and rebalancing. This overview tells you how to be sure you consider your time horizon - the years or decades you anticipate being able to invest - and something called your "risk tolerance," which will help you decide whether you are suited to investing in blue-chip stocks or junk bonds.
Going cold. Financial planner Robert Brokamp says, "By rebalancing a portfolio, you're aiming to sell hot investments before they turn cold, then use the proceeds to buy investments that are warming up." Does it always work that way? Brokamp, a regular contributor here at Getrichslowly.org and at the Motley Fool site, makes a good argument that rebalancing annually works better than not rebalancing at all.
Acts of madness. Rebalancing, as described here at Monevator.com, is a matter of selling outperforming investments and buying underperforming ones. "This apparent act of madness is banking on mean-reversion," says the post. Mean-reversion is a theory that prices and returns - however high or low they go - will move back toward their long-term averages over time. But, "Beware! The more often you rebalance, the more likely you are to curtail the superior returns of the winners."