You May Be Unbalanced, Thanks to Rising Share Prices
By Jonathan Clements, Director of Financial Education, Citi Personal Wealth Management November 05, 2012 10:00 AM
It's been a good year for stocks, which means you might want to think about "rebalancing." What's that? Imagine your goal is a portfolio with 60% in U.S. and foreign stocks and 40% in high-quality bonds, certificates of deposit and other conservative investments, and that was the mix you owned at the start of 2012. Even if you haven't done any trading this year, you may now have significantly more than 60% in shares, thanks to the stock market's rise.
To get back to your original target portfolio percentages, you would need to shift money to the bond side of your portfolio to build it back up to 40%. By lightening up on stocks, you'll hurt your portfolio's performance if the market continues to rise, but it'll help if stocks decline from here.
Rebalancing, however, isn't principally about boosting performance. Rather, it's about managing risk. By rebalancing, whether it is adding to stocks at a market bottom or lightening up on shares during a bull market, you can help your portfolio stay closer to the risk profile you originally settled on. Some investors rebalance at fixed intervals, such as every quarter or every year, while others do so only after big market moves.
One warning: Rebalancing can mean selling investments with capital gains, so it's best done in a retirement account, where selling won't trigger a tax bill. Even with a retirement account, you should consider the investment costs involved when buying and selling. What if you need to rebalance within a taxable account? To reduce the amount of buying and selling you need to do, you might focus on directing dividends, interest and new savings to those parts of your portfolio that have become underweighted.
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