Rebalancing your portfolio

Rebalancing Your Portfolio

Excerpts from the Book – Preserving Wealth – written by Jack Lumsden, MBA, CFP®

Today we are going to be reviewing portfolio rebalancing, and how it can be used to your advantage. Sometimes it is hard to know when to make adjustments and when to leave your portfolio alone. By creating a systematic plan, you are able take advantage of global market fluctuations.

The following excerpt reviews this.

Exactly,” Uncle Wayne agreed. “But people will bail out of their investments when they see a decline in value, and then they’ll buy when prices start going back up. They’re doing exactly the opposite of what they should. It’s obvious that these people don’t have a long-term plan or a wise old uncle!”

“How do we buy low and sell high?” I asked. “Isn’t that what the experts call market-timing?”

“I’ve got an answer for you that will be easier in the long run. We’ve already reviewed the various asset allocations based on risk level and goals. Of course, the balance between the equity and income assets you’ve chosen will shift over time, because the assets grow at a different rate.

“Keeping in mind the allocation of the portfolio assets between cash, bonds, and stocks, can deter­mine up to 85% of the difference in returns on your invest­ments, so you’ll want to make adjustments in your portfolio now and then to keep your ideal balance intact.

That’s what we call rebalancing your portfolio, and you should do it once a year, or whenever your portfolio shifts out of balance by more than 5% to 10%. This will help you to buy low and sell high.”

“I understand the rebalancing concept,” Mark said, “but I don’t see how it helps us buy low and sell high.”

“Ok, I’ll give you an example. Let’s say you’ve got $100,000 to invest at the beginning of the year, and your ideal asset allocation is 50/50 between equity/growth and income investments. When the end of the year rolls around, the equity portion might have grown by 10%, so it’s worth $55,000. The fixed income may have grown by a different rate, let’s say 3%, so their value would be $51,500. Your total portfolio would now be worth $106,500, but the asset allocation would no longer be 50/50, so you’re out of balance. To rebalance your portfolio, you’d have to sell off the appropri­ate amount of growth investments and use the money to purchase income investments. In this case, you want $53,250 invested in each category, so you’d sub­tract that amount from the value of the equity funds to tell you how much capital you need to move to guaranteed investments in order to rebal­ance your portfolio. By the way, the answer is $1,750. By doing this, you would have sold some growth investments at a high dollar value; in other words, you have ‘bought low, and sold high,’ and you’ve protected some of your profits.”

“So,” I reasoned, “if stocks were going through a temporary lull, and the income portion had increased in value more than the equity portion, then we’d have to rebalance by buying equity investments with a portion of the proceeds with the fixed-income investments.”

“Of course,” Sandra added. “That makes per­fect sense. If you’re going to buy stocks, buy low, when they haven’t gone through a spurt in growth.”

Uncle Wayne looked at us with pride. “I’m glad you get it. By rebalancing your portfolio yearly, or whenever it’s out of balance, by 5% to 10%, you automatically buy low and sell high. People who did this in 2008 really benefited during the upturn starting in 2009.”

For more information, you can refer to Preserving Wealth: The Next Generation – The definitive guide to protecting, investing and transferring wealth by Jack Lumsden, MBA, CFP®


This material is provided for general information and is subject to change without notice. Every effort has been made to compile this material from reliable sources however no warranty can be made as to its accuracy or completeness. Before acting on any of the above, please make sure to see me for individual financial advice based on your personal circumstances. The information provided is for illustrative purposes only. Commissions, trailing commissions, management fees and expenses, may all be associated with mutual fund investments. Mutual funds are not guaranteed, their values change frequently, and past performance may not be repeated. Please read the Fund Facts and consult your Assante Advisor before investing.

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