The End of the Year Means It’s Time to Rebalance Your Portfolio

In about a month or so, your mailbox will start to get filled with year-end bank account and investment statements.

And for the first time in a while, you won’t have to cringe when you look because as a whole the market has done pretty well this year. The S&P 500 is up over 20% year-to-date and many sectors as well as international stocks have done better yet. Even bond funds are rallying (although if you fled to Treasuries this year to avoid the chaos, you might be a bit disappointed).

When you have years like this where one asset class significantly outperforms another (or like last year when stocks significantly underperformed), your overall portfolio allocation may now be a little out of whack. With the new year approaching, there’s no better time than now to bring your allocation back in check.

Financial planners recommend that you examine your allocation about once a year. Doing it more frequently can be inefficient and cost-prohibitive and doing it less frequently could leave your portfolio seriously out of balance. That’s why most feel that the month of January when you have your entire financial life in front of you is the best time to do it.

Your target asset allocation should be a product of your age, risk tolerance and goals. For instance, a younger investor tends to have a portfolio more heavily weighted in equities due to the long period of time he or she plans on staying invested. Conversely, an individual nearing retirement typically has a larger investment in bonds and cash since they will need this money to provide a steady income when they’re no longer working.

Here’s how it works.

For the sake of this example, let’s say you have a modestly risky target allocation of 60% stocks and 40% bonds. The stock market has been good to you this year and your allocation now sits at 65% stocks and 35% bonds. In order to get back to your target, you’ll need to sell some of the stock investments and move that money into bonds. It’s as simple as that.

If you need a good reason to rebalance your portfolio, consider this. It could add money to your pockets!

Advisors and anyone else with some common financial sense will tell you that you should always buy low and sell high. One of the real advantages to you is that when you rebalance your portfolio, you’re doing just that. Using our example, stocks are a larger percentage of your portfolio because they’ve done well. You would be selling stocks after they’ve increased in value and invest that money in bonds which have comparatively underperformed. Studies have suggested in fact that portfolios that are rebalanced on a regular basis outperform those that aren’t due in large part to the “buy low, sell high” advantage.

The new year is a time to make resolutions and commit to making changes for the better. This year, make rebalancing your portfolio one of your resolutions and reap the benefits for years to come.

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Author Info

This post was written by David Dierking. David lives outside Milwaukee, Wisconsin and has been working in the financial services industry for over 13 years with a background in investments, accounting, and marketing. He earned his Chartered Financial Analyst designation from the CFA Institute in 2004 and was recently published in the Milwaukee Business Journal. You can also check him out at The Ultimate Fit Challenge

2 Responses to “The End of the Year Means It’s Time to Rebalance Your Portfolio”

  1. Sheri |  Dec 03, 2009 at 1:56 pm

    I always rebalance my portfolio in the first couple weeks of the new year. I wait for all the dividends and such to post first. I only rebalance once a year and then dont even worry about the market the rest of the year.

    I sleep very well with this strategy.

    I just use a portfolio rebalancer program I purchased online (was cheap), it allows me to save the data in a format that works for me.

  2. Edwin |  Dec 03, 2009 at 6:43 pm

    This is a great strategy for the long term investor. Thanks for posting this reminder and explanation.