What is Asset Rebalancing?
"Asset allocation should be an ongoing process. By
figuring out what percentage of your money you want in each
sector and then periodically rebalancing, you may actually
be able to improve performance over time."
- Lorayne Fiorillo, author of
Financial Fitness in 45 Days
Because markets tend to rise and fall without any regard
to investor objectives, the percentages allocated to specific
asset classes over time may no longer be in sync with your
initial desires.
For example, say the stock market experiences a five-year
bull run, consistently posting outstanding gains. However,
the bond market remains flat over 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.
For this reason, it's necessary to periodically check your
portfolio's asset allocation and ensure it's still in line
to reach your goals. Automatic asset rebalancing programs,
frequently offered by mutual fund and annuity companies--make
it easy to maintain your asset allocation strategy. Here's
how they work: When you first make the investment, you determine
what percentage of assets should go into each fund or portfolio.
Thereafter, the investment is periodically rebalanced to adhere
to those original allocations.
Life Changes
What to do if changes in your personal life have an effect
on your investment's asset allocation.
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