Web Wealth: Take the mystery out of 'rebalancing' your investments
Stocks did pretty well in 2014, but what about 2015? Since nobody knows, many financial experts say it's smart for investors to "rebalance" a portfolio. Here's what that is all about.
Stocks did pretty well in 2014, but what about 2015? Since nobody knows, many financial experts say it's smart for investors to "rebalance" a portfolio. Here's what that is all about.
Bonds, stocks, or other investments that were sleeping dogs last year may jump to the head of the pack next. In managing an IRA, 401(k), or other accounts, it's good to be ready for changes. Do that by rebalancing. The Financial Industry Regulator Authority provides an overview at its site, FINRA.org. Since rebalancing is hard for many people to understand and do, providers such as mutual fund companies offer to do it for you, if you put your money into so-called lifecycle or target-date funds. "Each lifecycle fund is designed to have its allocation modified gradually over a period of years, shifting its focus from seeking growth to providing income and preserving principal," this post says.
"If an investment is successful, naturally, you'd want to stick with it. The last thing you'd want to do is sell some of your winners to invest more money in your investments that aren't doing as well" - but that's exactly what you should do, says this tutorial at Morningstar.com. "No matter how unnatural that practice seems, however, that process - called rebalancing - is an essential part of managing your investment portfolio." The Morningstar "course" on rebalancing explains the rationale behind trimming back on winners to protect gains and position your portfolio to benefit from market changes.
Deciding what your personal investment mix ought to be is not easy. This Morningstar tutorial helps with instructions for creating your own "investment policy statement."
Don't try to time your rebalancing act to dips in the market, say investing experts at the Malvern-based mutual fund giant Vanguard Group. This post and video explain two "triggers" for rebalancing: "If your asset allocation has strayed 5 percent or more from your target allocation, or if your time horizon is significantly shorter since the last time you looked at your asset mix."
At Bankrate.com, analysts and planners give intervals from monthly to quarterly to just once or twice yearly. The potential for triggering fees and taxes should factor in a decision on how often to rebalance, the post by Sonya Stinson says.
For a contrary view, see this post by economist Lewis Mandell, at MarketWatch.com. Mandell says he never rebalances his portfolio. For one thing, he writes, rebalancing can be dangerous in a rapidly falling market. For another, risky investing is good for those (few) investors who don't have to worry about losses.