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Asset Allocation
Time to Rebalance
By Roger Wohlner
CERTIFIED FINANCIAL PLANNER™ Practioner, Asset Strategy Consultants
With an asset allocation strategy, you can't just allocate assets in your portfolio once and then forget about your portfolio. Over time, your actual asset allocation will stray from your desired allocation because different investments in your portfolio will experience different rates of return. At least annually, review your portfolio to see if changes are needed to bring your allocation back in line. Some factors to consider include:
Reevaluate your desired asset allocation percentages, deciding whether they're still appropriate for your situation.
Over time, how much you want to allocate to different asset classes will probably change as your personal circumstances change. For instance, you may want a high percentage of your portfolio in stocks when you are younger, but may want to increase your fixed-income investments as you approach retirement age.
Decide how much variation you are willing to tolerate in your asset allocation.
Varying market values and rates of return make it difficult to maintain precise asset allocation percentages. For example, you may start to monitor your portfolio more closely if an asset class varies by 5% of your desired allocation, and rebalance when it varies by 10%.
Consider the allocation of your total portfolio, including both tax-deferred and taxable portions.
Where possible, rebalance your tax-deferred portfolio, since this typically does not generate a tax liability.
Review the tax ramifications before selling investments to rebalance your portfolio.
Since selling assets from your taxable accounts can result in taxable transactions, look for other ways to rebalance. You can make new investments in assets that are underweighted in your portfolio. Periodic interest, dividends, or capital gains can be redirected to other asset classes rather than reinvested in the same asset. Consider making withdrawals from overweighted asset classes.
Monitor your level of diversification both within and among asset classes.
Evaluate your allocation within asset classes to make sure one or two investments are not dominating that portion of your portfolio.
Realize it can be difficult psychologically to sell an investment that is performing well.
However, you selected your desired asset allocation percentages to help reduce the risk in your portfolio. Your portfolio may become more risky if an asset class starts to dominate your portfolio.
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