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Reallocating Your Assets

Ed Tierney believes in stocks, and has invested in them since he was 16 years old. But as Ed approached retirement, the stock market just happened to experience a decline. That's when Ed decided he needed to transfer at least a portion of his assets into more conservative investments, such as bonds and money market funds. That he way he has a better chance of retaining the interest he earned in stocks over the years.

Why Rebalance?
Because markets tend to rise and fall without regard to investor objectives, the percentages allocated to specific portfolios over time may cease to represent what you initially specified. Here's an example of what can happen:

  • Say the stock market experiences a five-year bull run, consistently posting outstanding gains
  • However, the bond market remains flat during this time period
  • Although you may have initially allocated a 50-50% split between the two asset classes, you may find that due to its superior performance, stocks now represent 75% of your overall portfolio.
  • If you don't rebalance to get back to your original allocation, you will incur much more investment risk than you originally bargained for.

You should review your investments at least once a year to see if your portfolio needs rebalancing.

Time to reassess
You may need to reassess your original allocation if your personal circumstances change. Here are a few such scenarios:

Problem:
You need to liquidate some of your portfolio for emergency cash, and find yourself behind in meeting your financial goals
Possible Solution:
Increase your stock allocation to better position your portfolio for increased growth opportunities

Problem:
You grow older and wish to design a more conservative portfolio in order to protect your investment earnings
Possible Solution:
This scenario may call for a lower allocation of stocks and an increase in bond and cash holdings

Problem:
The manager of your mutual fund practices excessive trading, resulting in high turnover and additional capital gains taxes for you
Possible Solution:
Sell your mutual fund shares and reinvest the assets in a mutual fund with a similar objective, but which boasts a lower turnover ratio

Ideally, you shouldn't change your asset allocation based on market conditions, but rather only when your own financial goals or circumstances change. A huge allocation to stocks may be fine if you're 25, but if you're 57 and worried about your money being there when you retire, you'll want to maintain a healthy balance among your security selections.




 

 

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