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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.



In my company sponsored 401(k) plan, I have the option of putting the funds into a brokerage account with Charles Schwab, putting the funds into a selection of numerous funds, or a mix of both. Until the last three months, I’ve opted to simply divvy up my contribution among the numerous funds with nearly all of it in stocks and a third of that allocation in emerging markets. This strategy has proved very favorable for me because year to date the emerging market fund has appreciated double digits while all other funds have appreciated no more than 4.2%. That being said, financial experts always suggest that you review and rebalance your portfolio so that it has the correct percentages in the investments you want them to be in.

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.

Fund Category Percent Benchmark
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
Company Growth, Stocks 4.79% N/A
Brokerage Growth, Stocks 25.7% N/A

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 [3].

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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[3] 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

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