Rebalancing
Your Portfolio
By Jodye Deal
Article published in The Network Journal
magazine
 Whether
your portfolio is
drowning or is merely waterlogged, this is a good time to reexamine your investment
blueprint and, if necessary, make midcourse corrections.
The aftermath of a turbulent market is the perfect time to determine whether your
investments are properly diversified.
Stock markets can go down just as easily as they go up.
The value of diversification becomes particularly obvious when markets drop.
Investors who didn’t take their investment planners advice to diversify, might
wonder during a bear market when is the market going to stop going down.
 Some investors in
an attempt to preserve capital see a bear market as a reason to cash out.
However, this is typically a mistake if you have a long-term strategy for your
investments.
Other investors see this as an opportunity to buy.
In a bear market, the only money invested now should be considered long-term money.
In other words, it’s too late to sell in a down market.
To avoid the compulsion to sell, don’t watch investment programs and
don’t open your brokerage statement, there’s no point in it.
As many investment planners know, dark
clouds have silver linings.
Bad
markets present an opportunity to revisit investment strategy.
It is
an opportunity to take another look at your goals and assess the reasonableness of the
assumptions you initially used in your investment planning based on new, reduced stock
prices.
The
diversification tactics you and your investment planner originally used may have lost
their effectiveness.
 Assets with low
correlation to each other tend to have contrasting performance from year to year.
This contrasting performance can be beneficial in a portfolio. Subsequently, a bear
market is a great time to rebalance your portfolio.
The term rebalancing implies a portfolio management protocol in which, at the end
of a certain time period (for example, annually), the amount of money in each asset within
a portfolio is either equalized or brought back to a predetermined percentage of the total
portfolio.
Rebalancing accomplishes the reduction of assets that performed best (or worst) and
the reinvestment of those proceeds into other assets to bring the portfolio to its
original balance.
Rebalancing
forces the investor to periodically sell high and buy low.
In a way, this is a type of professional-level dollar-cost averaging.
 What
is the benefit of rebalancing your portfolio?
To achieve a better return, or a reduction in volatility?
With an asset allocation portfolio that utilizes annual rebalancing, the goal may
be both return and risk minimization.
Moreover, by setting a pattern of rebalancing every year, an investor becomes
accustomed to skimming profits off winners and depositing them into laggards.
From this perspective, it’s possible to look at poorly performing assets in a
more positive light, specifically as a buying opportunity.
Perhaps most importantly, asset allocation becomes a proactive management pattern,
rather than a reactive, asset-rotation shell game.
While it may be natural for the market
to decline periodically, it is never easy for investors to stay calm.
Here
are a few strategies that may help weather the storm.
Develop realistic return expectations.
Although investors were thrilled when annual returns on
the S&P 500 Index topped 35%, most investors should expect less than 10% returns from
the stock market. History is the best
indicator of what the market may do in the future.
Diversify your portfolio.
As one of the most venerable portfolio strategies, diversification can
reduce overall volatility. It has long been
understood that different asset classes react differently to changes in the economy and
the financial markets. A portfolio composed
solely of small-company stocks may not perform in the same way during a market downturn as
a portfolio of large-capitalization stocks.
Consider some actively
managed funds over passive funds.
In recent years, passively managed funds (index funds)
have become popular. In downturns, these
funds mirror the market and move where the market moves.
Actively managed funds may be able to find more attractive, promising investment
opportunities and take defensive action, shielding against the downturn.
Add to your portfolio by
using dollar cost averaging.
This strategy takes the guesswork out of when to buy
because it is impossible to know where prices are headed.
Stick with your
investment strategy.
If your portfolio is tailored to your goals,
risk tolerance and time horizons, you probably won’t need to make drastic changes.
Utilize your investment
or financial planner.
Your investment professional can assist you in analyzing
opportunities objectively, rather than making decisions solely on the basis of
performance.
A key step to a
successful equity portfolio is to underscore history’s lesson about stock market
returns. Over the long-term, equity
investments provide strong returns and outperform inflation and many other assets. The best way to prepare for an uncertain future is
to do two things: keep a long-term focus and
make sure that your portfolio is adequately diversified and fit your risk tolerance.
This article was published in The Network Journal. Jodye Deal,
contributed this article for the New York-based magazine. If you have
questions on investing, please send them to Investing@GazelleAssociates.com.
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