Rebalancing – Keep Your Portfolio Up with the Times and Circumstances

A portfolio requires rebalancing under many circumstances. A stock market run-up could warrant a change in your investment mix from its present allocation of say, 60% stocks to a much higher risk level of perhaps 80%. On the other hand, rapidly rising interest rates could threaten your bond holdings. Maybe a sector such as financial stocks looks ripe for harvesting some profits and placing them in other sectors for better diversification.

It may also be possible that you are nearing goal and you need to adjust your asset allocation mix to a safer and more moderate one. Maybe a shift in economic trends, government regulations on some industries, or the structure of capital gains has made a alteration in fund balance more attractive and effective in getting you where you want to go financially.

It?s a good idea to consult your financial advisor before making any such moves. Selling stocks at a profit is a taxable transaction and there will be transaction fees along with that. “Churn” or the frequent buying and selling of investments, is a great way to feed the coffers of stock brokers and tax collectors and lower your profit per transaction considerably. Pay attention to the cost of each and every transaction you make.

You might balance a gain by selling losers simultaneously or by rolling the funds into an IRA. Correct navigation of sales and purchases makes a major difference to the future success of your investments. Never proceed with such transactions on impulse or without some good advice from a financial professional whom you trust.

Your investments will never all earn or lose at the same rate, so they will inevitably come out of balance. You may want to examine your balance quarterly, but be sure to do it at least once a year. One way to rebalance is to sell off some of the investments that have gained a lot of value and buy investments in areas that have lost or made only modest gains.

Selling a winning horse and buying a slow one probably flies in the face of common sense, but don’t forget the old stock mantra: Buy low, sell high. If you never take profits and expect them to lose over time, you have lost control in your investing. You don’t think it’s sage to nip a blooming stock in the bud, so you let it blossom a bit, but do not hesitate to prune when the bloom is off the posy. Choosing investments to buy and sell must never be a crap shoot. Get advice from a trained investment strategist who has an in-depth sense of the current market.

You can also rebalance your portfolio by purchasing additional stocks in under-performing categories or sectors to get your allocation back in order, or you can move your continuing contributions from one area to another until the proper balance in achieved.

You can also invest in mutual funds that basically rebalance themselves. Index funds, for instance, are unmanaged and will periodically alter their investments to maintain the same complexion as the index, such as the S&P 500 or the NASDQ. There are also managed funds that are adjusted to keep on an even keel.

For long-term rebalancing, you can buy funds that alter their asset allocation as they get closer to maturity. You might buy a ‘Target 2045′ or ‘Retirement Fund 2050′ to reflect the year in which you will turn 65 or plan to retire. They will automatically dial down the risk as certain milestones are crossed without any attention from you.

Good wealth management strategies involve managing risk, time, asset categories, and every specific investment in a way that will maximize both the return on your investment dollars as well as the security of your financial future.

If you are living in the Ann Arbor area and have questions about your finances, please visit Kennard Wealth for help with roth IRA conversions in Ann Arbor, life insurance in Ann Arbor, and other wealth management related topics.