Rebalancing Brightens Your Future
By: Source: AARP.org
“Digging up my bountiful daylily bed might seem counterintuitive, but
it’s something that has to be done periodically.” So says Sally Hurme,
a West Virginia gardener whose daylily garden started with a few
tubers transplanted from her mother-in-law’s garden a decade ago.
“The plants multiply so fast that they can overrun my garden, so it’s
best to dig them up from time to time. Sometimes I like to add new
flowers to add color and variety,” Hurme says.
Rebalancing your investment portfolio can also seem counterintuitive.Why should you sell some
stocks or bonds that are doing well just because your mix of assets moves away from your
target? Charles Alkire, CFP®, an independent financial advisor in Sarasota, Fla.,gives several
good reasons:
If the value of the stocks in your portfolio increases, the ratio of stocks to bonds could change.
Over time, you could end up with more risk than you want. Conversely, if your stocks go down in
value, you could have investments that are too conservative for your needs.
When some of your investments become clustered too tightly, you lose the benefit of
diversification.
Rebalancing can also give your portfolio an overall lift. You can move your investment dollars
into asset classes that are underperforming now but may perform better in the future.
It’s always better to buy low and sell high. Rebalancing forces you to sell investments that have
gone up in value. You’ll lock in profits rather than trying to squeeze out more returns by holding
on just a little longer.
Automatic rebalancing takes the emotion out of investing.
Your investment goals, as well as the market, change. When you review your asset allocation,
you ensure that your investments are in line with your needs.
You have four ways to rebalance. Let’s say that you determined that you wanted 60 percent of
your portfolio in stocks, 30 percent in bonds, and 10 percent in cash. During the past year, your
percentage of stocks has increased to 65 percent of your portfolio. You could sell off some
stock that has increased in value and invest the profits in bonds and cash until your original
percentages are achieved. Or you could sell any underperformers to generate the cash to
invest in your other asset classes. Your third option would be to invest new money into your
portfolio in the bonds and cash portion to bring those percentages up to the level you want. If
you are making continuous contributions to the portfolio, you can alter those so that more
investments go to under-weighted asset categories until your portfolio is back in balance. You
might consider investing in a mutual fund that provides instant diversification and automatically
rebalances at preset times. Many mutual fund companies offer asset allocation funds that
automatically rebalance at preset times. Remember, too, that if you are rebalancing taxable
investments, there could be tax consequences (short- or long-term capital gains or losses) with
each transaction.
“Just as I need to divide my lilies periodically when they get too crowded, I also need to revisit
and change my investment mix from time to time,” says Hurme.
The Securities and Exchange Commission suggests that you rebalance your portfolio based
either periodically or on when your investment advisor tells you. It might be easier to remember
if you plan to check on the need to rebalance every six or 12 months. Quarterly visits with your
financial advisor are a great time to review the balance of your portfolio. The American Savings
Education Council suggests that you use the receipt of your annual Social Security statement
as a reminder to revisit your investments. Another tip is to let your investments tell you to that it’
s time to rebalance. When the percentage of an asset class increases or decreases
significantly, that is a good signal to rebalance.
http://www.aarp.org/money/personal/articles/rebalancing_brightens_your_future.html
By: Source: AARP.org
“Digging up my bountiful daylily bed might seem counterintuitive, but
it’s something that has to be done periodically.” So says Sally Hurme,
a West Virginia gardener whose daylily garden started with a few
tubers transplanted from her mother-in-law’s garden a decade ago.
“The plants multiply so fast that they can overrun my garden, so it’s
best to dig them up from time to time. Sometimes I like to add new
flowers to add color and variety,” Hurme says.
Rebalancing your investment portfolio can also seem counterintuitive.Why should you sell some
stocks or bonds that are doing well just because your mix of assets moves away from your
target? Charles Alkire, CFP®, an independent financial advisor in Sarasota, Fla.,gives several
good reasons:
If the value of the stocks in your portfolio increases, the ratio of stocks to bonds could change.
Over time, you could end up with more risk than you want. Conversely, if your stocks go down in
value, you could have investments that are too conservative for your needs.
When some of your investments become clustered too tightly, you lose the benefit of
diversification.
Rebalancing can also give your portfolio an overall lift. You can move your investment dollars
into asset classes that are underperforming now but may perform better in the future.
It’s always better to buy low and sell high. Rebalancing forces you to sell investments that have
gone up in value. You’ll lock in profits rather than trying to squeeze out more returns by holding
on just a little longer.
Automatic rebalancing takes the emotion out of investing.
Your investment goals, as well as the market, change. When you review your asset allocation,
you ensure that your investments are in line with your needs.
You have four ways to rebalance. Let’s say that you determined that you wanted 60 percent of
your portfolio in stocks, 30 percent in bonds, and 10 percent in cash. During the past year, your
percentage of stocks has increased to 65 percent of your portfolio. You could sell off some
stock that has increased in value and invest the profits in bonds and cash until your original
percentages are achieved. Or you could sell any underperformers to generate the cash to
invest in your other asset classes. Your third option would be to invest new money into your
portfolio in the bonds and cash portion to bring those percentages up to the level you want. If
you are making continuous contributions to the portfolio, you can alter those so that more
investments go to under-weighted asset categories until your portfolio is back in balance. You
might consider investing in a mutual fund that provides instant diversification and automatically
rebalances at preset times. Many mutual fund companies offer asset allocation funds that
automatically rebalance at preset times. Remember, too, that if you are rebalancing taxable
investments, there could be tax consequences (short- or long-term capital gains or losses) with
each transaction.
“Just as I need to divide my lilies periodically when they get too crowded, I also need to revisit
and change my investment mix from time to time,” says Hurme.
The Securities and Exchange Commission suggests that you rebalance your portfolio based
either periodically or on when your investment advisor tells you. It might be easier to remember
if you plan to check on the need to rebalance every six or 12 months. Quarterly visits with your
financial advisor are a great time to review the balance of your portfolio. The American Savings
Education Council suggests that you use the receipt of your annual Social Security statement
as a reminder to revisit your investments. Another tip is to let your investments tell you to that it’
s time to rebalance. When the percentage of an asset class increases or decreases
significantly, that is a good signal to rebalance.
http://www.aarp.org/money/personal/articles/rebalancing_brightens_your_future.html
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