Finances in 55 Seconds: Do You Need to Rebalance Your Portfolio?

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While it would be nice if you could just “set it and forget it” in the world of investing, the strategy rarely works. Even if you invest primarily in index funds, or are the staunchest of buy and hold investors, it is still a good idea to periodically review your investment portfolio and decide whether or not you need to rebalance.

While the actually rebalancing of your investment portfolio will likely take a little more time, it is possible to get a general idea of what your next step should be in 55 seconds or less. Gather up your latest investment account/retirement account statements, and get ready to see where you’re at:

  1. Consider diversity: Skim through your investment holdings. Are you diversified across asset classes? Do you have some diversity across sectors and industries. Have you allowed some foreign investments in to give you a little more diversity away from domestic holdings? Sometimes, you might find that you have more bonds than you would like, or that you have two funds that are almost identical in make up. Do a quick examination to see whether your diversity could improve. (21 seconds)
  2. Recognize upcoming milestones: Are you approaching a new life milestone? If you are about to retire, you might consider rebalancing so that you have more of your money in income providing assets considered relatively safe, such as bonds and cash. Even dividend paying stocks might make a good move as you approach a milestone. This is true of college savings investments and other items. If you need the money sooner rather than latter, it’s time to start shifting money around. (14 seconds)
  3. Has something changed about your investments?: This is an especially important question to ask yourself if you own individual stocks, or if you invest in a fund that concentrates on one particular industry. Consider whether the fundamentals of an investment have changed. Is management doing something different? Is an industry slowly dying out? Consider whether or not the investment still meets your needs. If your portfolio no longer meets your needs, it’s probably time to rebalance. (20 seconds)

If you decide that you need to rebalance your portfolio, it’s time to seriously consider what your next moves should be. If your problem is lack of diversity, think of what you should replace with something more diverse. If you think your portfolio has too many conservative investments, you could diversify into a few more riskier choices, such as commodities or currencies (just be sure that you are careful not to go beyond your risk tolerance).

When you see that you are approaching different milestones, you need to look for practical investments that can help you transition into the next phase of your life. As you move closer to retirement, for example, you want to move your money into investments that are considered less volatile, since few of us can afford a major stock market setback just ahead of retirement.

Finally, if you are concerned about what might be next for your investments, do some research to identify what investments might make suitable replacements. If you are concerned about a company’s cash flow, replace it with a company whose history is that of solid management and plenty of cash. Think about what concerns you about the investment, and then “fix” the problem with a new investment.

{ 2 comments, please add your thoughts now! }

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2 Responses to “Finances in 55 Seconds: Do You Need to Rebalance Your Portfolio?”

  1. I believe that one of the most important points that you made was #2 – to prepare and re-balance your portfolio when you recognize and anticipate life changes. For a long time, I only thought of re-balancing as doing the old 100 – my age to get the percentage of my portfolio to be in stocks and bonds for retirement.

    Oh how I was wrong when my daughter started college! I wish that I had done some analysis of the anticipated amount of ready cash that I would need. Looking back, I believe that if I had, the tax implications of some of the withdrawals and sales that I had to have made would not have been so severe.

  2. skylog says:

    i think rebalancing is a good thing for several reasons, even, at the very least, if it makes one take a regular assessment of their accounts.

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