Making Asset Allocation Work for You

Once you decide on your asset mix, one thing you must do to keep your portfolio working for you is rebalance it periodically. Rebalancing means bringing your portfolio back to your desired Asset Allocation mix. It is important to rebalance because some investments will grow faster than others, which will cause the ratios of different asset classes within your portfolio to be out of alignment with your investment goals. Periodically rebalancing your portfolio brings it back into alignment with your investment goals and keeps your portfolio within your risk-reward comfort zone.

For example, let’s say you determined that stock investments should represent 60% of your portfolio. After a market rally, stocks grow to represent 80% of your portfolio.

There are three ways to bring your portfolio back into alignment with your chosen Asset Allocation strategy:

1. Sell off investments from over-weighted asset categories and use the proceeds to purchase investments in under-weighted asset categories.
2. Add capital to make new investments in under-weighted asset categories.
3. If you make continuous contributions to your portfolio, alter your contributions so that more investment goes to under-weighted asset classes until your portfolio is back in balance.

In the example above, where stocks have rallied, it can be psychologically difficult to force yourself to rebalance your portfolio. It’s hard to rationalize shifting money from an asset that is performing well into one that isn’t. But don’t think of it as giving up on well-performing assets; think of it as locking in some of your gains. Cutting back on the current “winners” and adding more of the so-called “losers” allows you to accomplish one of our Investment Rules: Buy Low and Sell High