Time to Fix the Mix?

When the assets in your investment portfolio get out of whack, rebalancing can put them right—and protect your future.
Fix The Mix

“Don’t put all your eggs in one basket,” an old saying warns us, and there’s true wisdom there. If your balanced investment portfolio becomes too heavily concentrated in the “basket” of stocks and not enough in bonds—or vice versa—you could be putting your nest egg at greater risk than you intend.

Rebalancing can help. It means redistributing funds among asset classes to get you back to your intended “target asset allocation”— the percentages of invested funds placed in categories such as stocks, bonds, money-market funds or cash. Says Ray Tenpenny, a Cranford-based regional sales executive at the online brokerage firm Merrill Edge: “Think of rebalancing as getting your portfolio back to the mix of investments you chose based on your risk tolerance and life priorities.”

“Rebalancing helps ensure that you never take on unintended risk when one asset class outperforms another,” says financial planner Robert Taylor, vice president and senior branch manager for Fidelity Investments in Morristown.

Suppose that two years ago, planning your investment strategy, you decided to put 60 percent of your funds in stocks and 40 percent in bonds. Then stocks went crazy. Now you find that because of the growth in the shares of stock you own, you have 63 percent of your money in stocks and just 37 percent in bonds. That would be fine if stocks always went up, or if stocks were always a better bet than bonds. But we know those things aren’t true. And if stocks now happen to zoom downward, your 63 percent puts you in greater danger than the old mix—the one you chose—would have.

In this case, rebalancing means “you sell a portion of your stocks and buy more bonds to get the portfolio back to your desired level,” explains Robert Johnson, Ph.D., president and CEO of the financial services institution The American College in Bryn Mawr, Pa. “Rebalancing also forces you to buy assets that have recently underperformed and sell those that have recently done well. That discipline will provide great returns in the long run.”

But before you take this action, be aware of any transaction costs you may have to pay to accomplish such a shift and figure those into your decision. If you rebalance too often, it could cost you more than the adjustments would be worth.

Fortunately, some investment firms—especially with retirement accounts—offer free automatic rebalancing at specified intervals. There is also software that triggers a rebalance if a certain degree of change—say, 5 percent up or down—takes place in the percentage share allocated to a certain asset class.

Is automatic rebalancing better? “It’s a personal preference,” says David Walters, a portfolio manager with Palisades Hudson Financial Group. “It may be easier, but many investors prefer a more customized approach that you can’t get from software.”

How often to rebalance? It’s different for different people. “For the typical investor, in normal market conditions, annual rebalancing is likely very efficient,” says Johnson. “But in highly volatile market conditions it could be that you should rebalance more frequently.”

Of course, rebalancing isn’t magic. By reducing your stock holdings from that 63 percent to 60 percent, you could limit your gains if stocks continue upward, warns Jim McCarthy, managing director of Directional Wealth Management in Rockaway. But long-term planning remains your best guide.

Says Joshua Austin Scheinker, senior vice president/wealth management for Scheinker Investment Partners of Janney Montgomery Scott in Baltimore: “No one has been able to time markets, but with a disciplined approach you can help reduce your overall portfolio risk—and hopefully enhance returns.”

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