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You May Be Unbalanced, Thanks to Rising Share Prices

November 05, 2012
Jonathan Clements, Director of Financial Education, Citi Personal Wealth Management

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.

For more from Jonathan Clements, click here.

INVESTMENT PRODUCTS: NOT FDIC INSURED • NO BANK GUARANTEE • MAY LOSE VALUE

The information provided is solely for informational purposes. It is not an offer to buy or sell any of the securities, insurance products, investments, or other products named.

Diversification does not guarantee a profit or protect against a loss.

Investments are subject to market fluctuation, investment risk, and possible loss of principal.

Bonds are affected by a number of risks, including fluctuations in interest rates, credit risk and prepayment risk.

There may be additional risk associated with international investing, including foreign, economic, political, monetary and/or legal factors, changing currency exchange rates, foreign taxes, and differences in financial and accounting standards. These risks may be magnified in emerging markets. International investing may not be for everyone. Citigroup Inc. and its affiliates do not provide tax or legal advice. To the extent that this material or any attachment concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Any such taxpayer should seek advice based on the taxpayer's particular circumstances from an independent tax advisor. © 2012 Citigroup Inc. Citi Personal Wealth Management is a business of Citigroup Inc., which offers investment products through Citigroup Global Markets Inc. ("CGMI"), member SIPC. CGMI and Citibank, N.A. are affiliated companies under the common control of Citigroup Inc. Citi and Citi with Arc Design are registered service marks of Citigroup Inc. or its affiliates.

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