When is Rebalancing Your Portfolio Appropriate?
Filed in archive Investing , Retirement on March 19, 2007
I'm fortunate enough this year to have enough extra cash on hand to put some more money toward retirement, which will also let me pare down my 2006 tax bill. But I'm having a hard time deciding where to put it.
A few years ago my wife and I saw a financial planner. He suggested asset allocation formulas based on our age, income, etc. Then he suggested how those allocations might change over time. Basically he suggested we go from a riskier portfolio while young to a more conservative one as we get closer to retirement.
We followed his advice at first, but a perhaps predictable thing happened: a couple of our retirement "buckets" did very well, while others languished. Specifically, our riskier small cap funds did very well, while our large cap and international funds did only OK.
According to our financial planner, we should be rebalancing our portfolio over time to try to keep the allocation as close as possible to the percentages we discussed. That would now mean throwing more money at large caps, international, and now the dreaded bond funds in order to balance out how much money we have sitting in small caps.
You probably see where this is going. Why do I want to keep throwing money at the worst performing funds in order to try to craft a less risky portfolio, especially if the so-called risky funds continue to outperform the "safe" funds. If "safe" means lousy performance, I don't want to keep giving "safe" my money.
The theory of course is that the "risky" funds can go gangbusters for a while and then crash, while the "safe" funds are just that, safe. Lower-producing, but you won't lose your shirt.
There are two schools of thought on this, and maybe the school you're in depends on how risk-tolerant you are. For me, putting twice as much money into "safe" funds and still having less in them than my "risky" funds seems like lunacy.
I need a rebalancing scenario that I can live with, because the one that's been fed to me thus far isn't working for me.
How do you handle this issue?
Tags: investing retirement money finance portfolio funds portfolio+appropriate personal+finance real+estat
Vote for When is Rebalancing Your Portfolio Appropriate?:
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Response from:
R. Stavros Bezas
(03/21/07 2:47pm)
Response from:
Carey
(03/21/07 7:35pm)
Rebalancing locks in your gains from the "risky" part, and lowers your cost-average for the "safe" part. It's an especially good idea in your situation - those risky stocks could lose all their gains next year, but if you sell off the fat, you can put that money into your "tortoises". You know, the "slow and steady wins the race" types. Those large caps will make money in the long term, and you're putting more money in while they're low. What you're doing when you reallocate your portfolio basically boils down to "buy low, sell high". Ever hear of it?
Response from:
GURUPERF
(04/30/07 3:25pm)
As the now-(early)-retired manager of the investment performance group of a major money manager, asset allocation is something I've researched fairly extensively over the years. To summarize my thoughts from research results, rebalancing semi-annually when allocation percentages become 5% off target seems to moderately increase return while significantly lowering volatility. (e.g. a 25% target allocation would be reduced when it reaches 30%, a 10% allocation at 15%)
The selection of beginning of May, beginning of November fits well with some trends "Sell in May and go away" and December tax selling. By reviewing the portfolio twice a year, you lower transaction costs over a rigid 5% at any time rule which can cause buying and selling on short-term moves (not to mention the time spent monitoring the portfolio).
As for those who say just let your winners run forever, please remember the old Wall Street saying: "Bulls make money, Bears make money, Pigs get slaughtered"
Just my opinion - past performance does not imply or guarantee future results.
The selection of beginning of May, beginning of November fits well with some trends "Sell in May and go away" and December tax selling. By reviewing the portfolio twice a year, you lower transaction costs over a rigid 5% at any time rule which can cause buying and selling on short-term moves (not to mention the time spent monitoring the portfolio).
As for those who say just let your winners run forever, please remember the old Wall Street saying: "Bulls make money, Bears make money, Pigs get slaughtered"
Just my opinion - past performance does not imply or guarantee future results.
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The reason why you want to buy into the 'losers' is that when they do rally and come back you now have that much more of it to impact your overall return. This applies to all asset classes and not the bond funds. We are seeing an over allocation in our clients' portfolios to fixed income due to the recent market movements and will be rebalancing them out of the total bond market and buying equity!
Remember, asset allocation and sector location determine your return something like 94% while individual asset returns make up the remainder. (please don't hold me to those values, I can't back them up at this moment)