Kip Tips


How to Rebalance Your Portfolio

Cameron Huddleston

Adjusting your asset allocation regularly can help you stay on track to reach your goals.



Never changing your investment mix after selecting mutual funds and other assets when you first opened an IRA or 401(k) is a lot like setting the cruise control on your car and expecting that you won't have to speed up or slow down occasionally. We all know that we can't get on the interstate and maintain a constant speed -- we have to adjust frequently, or else ...

Investors need to take the same approach with their portfolios. In fact, neglecting to adjust -- or rebalance -- regularly is one of the biggest mistakes investors can make, says Jerry Miccolis, co-author of Asset Allocation for Dummies. If you don't rebalance, that asset allocation you worked so hard to achieve by picking the right percentage of stocks and bonds to reach your goals will be thrown off as the market rises and falls. The equity portion of your portfolio might dramatically outperform the bond portion, for example, and you end up with more risk than you want. Or your allocation might become to conservative for your tastes if the bond portion posts big gains.

When you rebalance, you buy and sell assets to maintain the right mix for your needs. Here are four tips to help you rebalance your portfolio:

Know your target. Before you can rebalance your portfolio, you need to know what your financial goal is and what type of assets you need -- and feel comfortable with -- to achieve that goal. How much do you want to be in stocks, bonds and cash? How much of your holdings do you want in the U.S. versus international investments? How much of your holdings do you want to be in a particular sector (technology, for example) or type of stock, say blue chips? Develop an asset allocation that suits your risk tolerance. Our risk-tolerance tool can help.

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Set a schedule. Rebalancing on a schedule -- rather than reacting to market swings -- helps take some of the emotion out of investing and also helps you buy low and sell high. At least once a year sell some big gainers that have disrupted the desired mix for your portfolio. Put the money back into assets that haven't done as well. (Shifting assets in a retirement account has no tax consequences.)

Evaluate your holdings. When you're deciding which assets to sell to maintain the allocation you want, also evaluate whether your investment choices still measure up. A mutual fund you picked last year might have changed its style (switching from value stocks to growth stocks) and no longer is right for your portfolio and risk tolerance. Or you might change. You might want more bonds in your portfolio as you near retirement, or you might decide you want to take on more risk.

Look at the big picture. Your portfolio isn't just what's in your current 401(k). It includes assets in IRAs, brokerage accounts and even your spouse's accounts. Make sure you rebalance all of your accounts simultaneously . If you rebalance one by one (or only one account), you won't achieve the right overall mix. Morningstar has a free Instant X-Ray that lets you enter all of your holdings to find your portfolios' strengths and weaknesses. (Be sure to print out your results if you want to use the as a reference the next time you rebalance.)

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