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Reviewing and Rebalancing Your Portfolio
Posted By Jim On 12/22/2005 @ 1:30 pm In Investing | 4 Comments
Every year, or every six months if you’re so inclined, you should review and potentially rebalance your portfolio. This is important because throughout the year the actual percentage an asset is in your portfolio will have changed from your original allocation. The reason this occurs is because some assets appreciated faster than others and so they make up a greater (or lesser) portion now. If you asset allocation strategy has not changed, you would do well to readjust the percentages back to your plan as long as it doesn’t cost you a significant amount. The process can be as quick as five minutes or five hours but its critical that you spend the time.
There are four major categories for the funds in my 401(k) plan: Capital Preservation, Income, Balanced, and Growth. Each has their own different benchmark but the majority of my funds are in those that seek to match various broad market indicides. The big three for me are emerging markets, a small cap fund, and an equity index fund which matches the S&P 500 index.
|International Bond||Income, Bonds||0.00084%||Citigroup World Government Bond Index|
|Equity Index||Growth, Stocks||19.97%||S&P 500 Index|
|International Equity||Growth, Stocks||8.4%||Morgan Stanley Capital International EAFE|
|Small Cap||Growth, Stocks||17.56%||Russell 2000 Index|
|Emerging Market Equity||Growth, Stocks||23.4%||Morgan Stanley Capital International Emerging Markets Free Index|
From the table and fancy Excel pie chart, I’m heavily invested in stocks and a high proportion of it (nearly a quarter) is in the emerging markets. I am tempted to shift a little from all the funds into an income fund based on U.S. equities but it seems like such a uber-conservative move for someone at my age. With the speed at which emerging markets are moving, it seems like a mistake to move money out of that fund even though risk diversification is the name of the game – landmark studies have shown that asset allocation has a huge impact on returns .
Even if you don’t plan on making changes to the allocation, it’s always good to be aware of how you’re spread around. Right now, I won’t be making any changes> but in the future I think I may move some of my equity funds and small cap funds into something that relies more on dividends for appreciation instead of price movement.
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 landmark studies have shown that asset allocation has a huge impact on returns: http://www.bargaineering.com/articles/retiring-rich-means-using-your-401k.html
Thank you for reading!