Your Portfolio and Rebalancing

Portfolio rebalancing is one of the most important tasks facing every investor! 

In simplest terms, rebalancing is the act of shifting assets from one asset class to another in order to realign a portfolio with a predetermined investment mix driven by an investor’s risk tolerance, investment objectives, and specific needs. 

Done correctly, it helps ensure the long-term health of your portfolio. 

As you might suspect, rebalancing can be approached in different ways.  Here are nine basic rules to guide you. 

One.  Construct your initial portfolio with an allocation that is sensitive to your tolerance for risk, investment objectives, liquidity needs, and tax situation.  Generally, this will involve a mixture of equity, fixed-income, and cash investments.  Alternative investments may also be present.  All of the afore-mentioned asset classes need to be properly diversified. 

Two.  Document your goals.  Said differently, state your goals, asset allocation target, and other considerations in a written investment policy statement.  This will enable you and your advisor to clearly understand your needs and expectations. 

Three.  Rebalance on a regular basis.  While most experts agree that rebalancing is essential to portfolio health, they often disagree about frequency.  The good news is that most studies suggest that annual rebalancing results in benefits similar to more frequent rebalancing.  But…be careful…see Rule Four! 

Four.  Don’t ignore global economic and political factors when making rebalancing decisions.  In recent years, these factors have greatly contributed to the direction and heightened volatility of securities markets, thereby suggesting more frequent monitoring and evaluation of rebalancing frequency. 

Five.  Do not allow the markets’ momentum to run unchecked.  Doing so could lead to unwise overweighting or underweighting in various areas of your portfolio. 

Six.  Remember that rebalancing may involve reducing or eliminating certain investments.  That, in turn, may create tax consequences, so factor them into your decision-making process. 

Seven.  Stick with your plan.  Remember…you created your plan with specific goals and future needs in mind.  Be careful not to be unduly influenced by the latest trends and well-meaning (but possibly wrong) friends and acquaintances.  Not sure?  Talk to your advisor! 

Eight.  Be careful with Rule Seven!  For many years, investors rigidly adhered to the mantras of ‘stay the course’ and ‘invest for the long term’.  While this may be a suitable approach for some investors, lessons learned from 2008 through the present suggest consideration of a more attentive and proactive approach.  

Think of it this way:  staying the course wisely requires regularly determining if the course you are on is still the appropriate one! 

Nine.  Report significant life changes to your advisor.  As we move through life, we (and our loved ones) experience marriage, divorce, health changes, birth, death, inheritance, career developments, and the sale of a business to name just a few.  These events may involve a significant financial dimension, thus triggering a need to rebalance your portfolio…or…to comprehensively reassess your investment plan. 

The first quarter of 2012 just ended, so it’s an ideal time to analyze your portfolio on a number of different levels…including your approach to rebalancing.  Talk to your advisor.

 If you don’t have a trusted advisor, the good news is that Greater Madison has several worthy of your consideration.  Wealth matters!


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