Rebalance Your Portfolio

You may have a good idea of how your investments are doing. You may even track them daily. But to keep you portfolio in decent shape, you need to check more than the bottom line. You need to check the scales—and make sure your portfolio is still in balance. Learn why, and get simple steps for keeping your portfolio balanced.

Why rebalance?
Getting out of balance is easy for a portfolio. As the market moves up and down over time, the way your money is distributed among different type of investments—your asset allocation—changes. Before you know it, your mix of investments can be much different than it was when you started out.

For instance, imagine you decided the best way to split your investments was 70/30 between stock mutual funds and money market funds. If the stock market rises, the growing value of your stock funds could shift the value of your portfolio. You might discover that your investments are now split 90/10—which means your portfolio is now subject to more risk than you intended.

How often should you do it?
So, how often should you check your portfolio to see if you need to rebalance? Once or twice a year is usually enough if your portfolio is spread among many asset classes. If your portfolio isn't that diversified, check it more often, such as quarterly.

Check your portfolio when you go through major life changes too. If you get married, have children, change careers, lose your job, get a divorce or retire, review your allocation and make sure it's still appropriate for your current lifestyle and risk tolerance.

Smart techniques to tip the scales
What if you find your portfolio has tilted away from your original plan? To get back on track, you need to rebalance. While rebalancing sounds simple, it's often easier said than done. You usually need to sell investments in a winning category and invest that money in an asset class that hasn't been doing as well.

You may hesitate to sell winning investments. If selling a winner really bothers you, don't sell all of your holdings in it. Consider selling half of your holdings, and ride out the rest for a while.

Here are some other rebalancing tips to consider:

• Tango with taxes. If you rebalance your portfolio every year around December 1, you could do your tax planning at the same time. If you sell winning investments to rebalance, you could trigger capital gains taxes. To avoid a hefty tax bill, you might then sell losing investments to offset your gains. Wamu Investments doesn't provide tax advice. Consult your qualified tax advisor.
  
  
• Drive up your purchases. Another tactic is doing some rebalancing with additional purchases instead of sales. In other words, if you want to boost the bond portion of your portfolio, contribute new money to bond mutual funds than to other investments.
  
  
• Don't nickel-and-dime yourself. Rebalancing doesn't mean you have to micro-manage your asset allocation. Your allocation doesn't have to be precise down to the dollar. Instead, pick a spread that feels comfortable to you—say, five or 10 percent—and rebalance only if your allocation is off by that amount or more. So if you end up with 73 percent in stock funds when you wanted 70 percent, you wouldn't worry about it. If you had 83 percent, however, it would be time to rebalance.
  
  
• Remember the risk factor. When stocks are on the rise, many investors get tempted to let stocks gradually consume more of their investment pie, because of potential high returns. If you do that, just realize that your risk grows too. In most cases, the potential risk tends to increase more than the potential return. Ask yourself whether you can tolerate that type of risk.
  
  
• Check your sectors. To stay well-balanced, you'll want to make sure one sector isn't dominating any category in your portfolio. Letting this happen can be easy—again, thanks to market appreciation. For example, you may own two technology stocks and an S&P 500 index fund. Since the S&P 500 is heavily weighted in technology stocks, this would mean your stocks aren't very diversified. With stock investments, check to make sure you're diversified among sectors, and that you're near your target weightings for large-cap, small-cap, growth and value stocks.

Remember what you want—and who you are
When you get ready to examine your portfolio, refresh your mind about a few things: Why are you investing in the first place? What is your true tolerance for risk? If you remind yourself of your goals, sticking with a plan and rebalancing when your portfolio is off-kilter will be easier.

Having an investment professional review your portfolio on a regular basis and help you rebalance can also be a big asset. Depending on your investments, you might want to sit down with your investment professional at least once a year to review your holdings and your goals.

Find an investment professional at a WaMu financial center near you for a free consultation.