Provided by Greg R. Solis, AIF®
President and CEO
Your investment portfolio may be off-kilter, and you may not even know it.
Is 80% of your portfolio held in equities? Perhaps it is without you realizing it. You could invite this risk, and others, if you go too long without rebalancing your portfolio.
Some investors stick with the same asset allocation in their investment portfolios (and retirement accounts) for decades: they “set it and forget it.” The longer the initial (target) asset allocation goes unreviewed, the greater the potential divergence between the target allocation and the actual allocation.
Just how off-kilter can a portfolio become without rebalancing? Some research from the respected financial analytics firm Ibbotson Associates provides an answer. Looking back, a portfolio with a 50/50 split between equities and fixed-income investments in 1926 would have had 96.7% of its assets held in equities and 3.3% in fixed-income vehicles by 2010 without rebalancing. Even a portfolio with only a 10% stake in equities in 1926 would have become 76.3% equities by 2010 with the same inattention.1
While these examples use an 85-year window of time, the lesson is clear. Inattention allows style drift: a shift away from the stated investment policy for the portfolio. (Heavier weighting in equities over time also implies increased volatility for the portfolio.)
What factors should lead you to rebalance? The first factor is the passage of time. You may wish to rebalance your investments every six or twelve months or just as needed in response to changing market climates. The other factor is variance. You may want to rebalance when the percentage of assets held in each asset class varies notably from the target allocation.
What should you rebalance? You can rebalance the percentages of assets held in various asset classe, or your investment choices within an asset class. (You can do both if you wish.)
In a bull market, having a greater percentage of your invested assets in equities than you would ideally intend may work out well. In a flat or down market, it may hurt your return.
Getting away from your defined long-run investment strategy can potentially impact your entire financial and retirement plan. Rebalancing gives you a chance to put your portfolio back on track.
Greg Solis is a Registered Representative with and, securities are offered through LPL Financial, Member FINRA/SIPC CA Insurance License #0795867
This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
Citations.
1 – thebalance.com/rebalancing-your-investment-portfolio-357128 [11/8/17]