Your portfolio can require rebalancing for a variety of reasons. A run-up in the stock market might push the mix of your investments from your chosen allocation of, say, 60 percent stocks to a much riskier level of perhaps 80 percent or rapidly rising interest rates might threaten the value of your bond investments. Perhaps one sector, like financial stocks, is ready to let you harvest some profits and put them into other sectors for better diversity.
It may also be possible that you are nearing goal and you need to adjust your asset allocation mix to a safer and more moderate one. Maybe a shift in economic trends, government regulations on some industries, or the structure of capital gains has made a alteration in fund balance more attractive and effective in getting you where you want to go financially.
It?s a good idea to consult your financial advisor before making any such moves. Selling stocks at a profit is a taxable transaction and there will be transaction fees along with that. “Churn” or the frequent buying and selling of investments, is a great way to feed the coffers of stock brokers and tax collectors and lower your profit per transaction considerably. Pay attention to the cost of each and every transaction you make.
You might balance a gain by selling losers simultaneously or by rolling the funds into an IRA. Correct navigation of sales and purchases makes a major difference to the future success of your investments. Never proceed with such transactions on impulse or without some good advice from a financial professional whom you trust.
Your investments will never all earn or lose at the same rate, so they will inevitably come out of balance. You may want to examine your balance quarterly, but be sure to do it at least once a year. One way to rebalance is to sell off some of the investments that have gained a lot of value and buy investments in areas that have lost or made only modest gains.
Selling a winning horse and buying a slow one probably flies in the face of common sense, but don’t forget the old stock mantra: Buy low, sell high. If you never take profits and expect them to lose over time, you have lost control in your investing. You don’t think it’s sage to nip a blooming stock in the bud, so you let it blossom a bit, but do not hesitate to prune when the bloom is off the posy. Choosing investments to buy and sell must never be a crap shoot. Get advice from a trained investment strategist who has an in-depth sense of the current market.
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Rebalancing your portfolio can also be done by purchasing more stocks in under-performing classifications or sectors to return your allocation to order, or you might try moving your continuing contributions from one area to another until balance is more to your satisfaction.
You might invest in mutual funds that by nature, rebalance themselves. Index funds are totally unmanaged and will occasionally change their investments to maintain the same complexion as the index, such as the S&P 500 or the NASDAQ. Don’t overlook managed funds that are adjusted to maintain their equilibrium.
Considering long-term rebalancing, you can buy funds that alter their asset allocation when they near maturity. You could purchase a “Target 2045” or “Retirement Fund 2050” to reflect the year you either become age 65 or plan to retire. These funds automatically slow down the risk when they span certain milestones without any attention from you.
Proper wealth management strategies include risk management, timing and asset categorization. Each specific investment must be handled in a way as to maximize the return on your investment while at the same time giving you security for your financial future.
If you are living in the Ann Arbor area and have questions about your finances, please visit Kennard Wealth for help with estate planning in Ann Arbor, employee retirement plans in Ann Arbor, and other wealth management related topics.