Is It Time For A Portfolio Tune-Up?

Growing Your PortfolioWhen you invest, it is a good idea to allocate specific percentages of your portfolio to different types of investments depending on your age, goals, and tolerance for risk.

For instance, a 30-year-old professional saving for retirement may want to invest 70% of her savings in stocks, 25% in bonds, and 5% in cash. Even within her stocks, she may allocate 50% to large cap stocks, 30% to small cap stocks, and 20% to foreign stocks. Since different investments earn different rates of return, their values grow at different rates, changing the weightings in your portfolio.

By the end of the year, you may notice that the stock portion of your portfolio has done great and now represents 80% of your savings instead of 70%. While you should definitely rebalance when your financial objectives or life circumstances change, you also want to rebalance on a regular basis to spread your risk more evenly.

Here are three popular methods for rebalancing your stocks:

Rebalance annually. Choose a date to rebalance, perhaps at the beginning of the year, when you receive your annual statements, or at the end of a quarter. On that date every year, compare your current allocation to your target allocation. Rebalance any allocations off by more than 5 – 10%. Once you have rebalanced, don’t be tempted to make other rebalancing changes during the year.

Rebalance when your allocation differs from your target allocation by a designated percentage. With this type of rebalancing method, you monitor your portfolio more frequently, perhaps monthly. Once your allocation moves from your target allocation by a predetermined percentage, perhaps 5 – 10%, you rebalance your portfolio.

Rebalance based on current market conditions. With this approach, rather than one specific percentage for each asset class, you might have a target range. For instance, you might allocate anywhere from 30 – 50% of your portfolio to large-capitalization stocks. Depending on your views of the market, you might want to allocate near the low or high end of that range. Thus, your allocation will change as your views about the market change.

There are many ways to accomplish changing your allocation among investments. You can purchase additional amounts of the investment that is underrepresented in your portfolio. You can sell investments in overrepresented portions and invest the proceeds in under-represented portions. Any withdrawals can be taken from over-weighted investments. Income from your portfolio can be invested in underweighted investments. Ultimately, you need to consider tax ramifications and your own individual investment preferences.

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