Most of us hear about the need to rebalance a portfolio, but knowing the best method to use can be more than just a little tricky. The last thing you want to do, though, is to just leave it alone. Rebalancing your portfolio, at least occasionally, will enable you to take advantage of economic changes and help you reduce risk and position your portfolio for future growth.
By occasionally looking over your investments and then rebalancing your portfolio, you should be able “to sell hot investments before they turn cold,” says Robert Brokamp at GetRichSlowly.org. It also enables you to take advantage of other investments that are just getting warmed up. The goal is still to buy low and sell high.
Whether or not you rebalance your portfolio monthly or yearly will be your choice. Knowing how to rebalance portfolio is the tricky part. Money.CNN mentions that when the T. Rowe Price researchers tried to determine whether monthly or annual rebalancing would work best in 2009, they found that annual rebalancing worked best. The period they used was the previous 10- and 20-year period with a 60 percent stock, 30 percent bond, and a 10 percent cash portfolio. Of course, this does not at all prove that it is the best strategy in everyone’s case for all times.
Rebalancing a portfolio may be needed, says Investopedia, whenever the intended percentages of your investments get out of balance. For instance, you may originally have intended to have 60 percent in stocks and 40 percent in bonds. Over several years, you discover that the actual percentage of your investment money in stocks had grown considerably faster, and now is actually at 85 percent of your investment. Rebalancing means that you will need to sell off some of your stocks and reinvest it into the weaker bonds, or, you could simply invest additional money into bonds to bring it back to your original percentages.
One strong reason for portfolio rebalancing is to help protect it, too. In the late 1990′s, people that had a lot of investments in the telecommunications industry lost a lot of their investments when the bubble collapsed, says the Wall Street Journal.
Determining just how much to rebalance your portfolio also depends on your level of risk. While greater asset values can be gained faster with higher risk, there is also the possibility of sustaining greater losses.
Before you rebalance your portfolio, the SEC suggests that you check with your investor to see what the costs will be. It is possible that if a large transaction is needed to bring about the balance desired that there may be considerable costs involved.
An easy way to manage the rebalancing of your portfolio is to invest in a mutual fund account that enables you to select the balance you want – say 60 percent stocks and 40 percent bonds. These accounts often provide rebalancing for you and it is part of the package. This lets some of the pressure off of you, but you do want to check up occasionally and make sure that they actually are doing what they are supposed to do.
This article was first published on http://moneyprime.com.