Review Your Investment Performance Every Year
After some deliberation, you've found the asset allocation that matches your
investment goals, time horizon, risk tolerance, and financial situation.
But that doesn't mean you can sit back and let your investments take care
of themselves. You'll need to perform periodic checkups. If you find that
over time your investment mix has veered from its target allocation,
you'll also need to rebalance your portfolio.
Suppose you decided a year ago that your desired allocation was 60% stocks/40%
bonds. But a bullish market
over the past 12 months has caused the stock portion of your portfolio to
grow to more than 70% of your total allocation. That means your
portfolio's exposure to stock market risk is greater than you had
intended. You need to rebalance.
Keeping an eye on your portfolio's asset allocation also ensures that your
portfolio is closely aligned with your own investment objectives.
If you allow your original allocation to get off kilter, you'll move out of
your risk vs. reward comfort zone. That's because:
- If your stock holdings rise above your original allocation, your risk
exposure increases.
- If your stock holdings fall below their target, your future growth may be
lower.
However you rebalance your portfolio, start by figuring out how much you plan to
reallocate. If it's more than 10% of your portfolio, and you're moving
into a more aggressive portfolio, make the shift gradually, perhaps over
the next few months or even years. If you're moving into a more
conservative portfolio, you can make the change more quickly.
Also, consider the impact of taxes and transaction costs. If the sale of shares
would trigger a big tax bill, then rebalance instead by adding new money,
or directing dividend distributions, to your underrepresented assets. You
can also add new money, or direct dividend distributions, to your
tax-deferred assets instead of your taxable assets.
A "bullish market" is a market that gains value over an extended period of time. By contrast,
a "bear market" loses value over an extended period.
Check with a financial planner or tax adviser if you are shifting large amounts.
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