If you read my recent post on Stay the Course Investing, you'd be familiar with written Investment Policy Statements. This is a simple plan of attack for reaching financial goals, and is something we can refer back to throughout our lives to assure we continue making the right choices with our investments and savings.
Now that the DOW and other indexes have reached all time highs, we should take a look at our overall asset allocation to see if any changes need to be made. Let me give you an example of a sample portfolio:
-His 401k: $60,000
-Her 401k: $40,000
Total Portfolio: $147,290
Here's a snapshot of the portfolio allocations on 7/24/13:
|Domestic (VTSMX)||International (VTIMX)||Bonds (VTBMX)|
Investor's written investment policy:
*Age-10 in Bonds (current 25 years old): 15% Bonds, 85% Equities
*70% Domestic Equities, 30% International Equities
Currently, the portfolio's equity portion is at 72% Domestic, 28% International. This is very close to our target allocation of 70/30. If I were managing this portfolio, I'd "sit tight" until something deviates 5% or more from our target.
The equity position is at 82.7% of the total portfolio, with bonds at 17.3%. This is only a deviation of 2.3% from our target of 15% in bonds, but for investors with an automatic deduction from their payroll or checking account, an easy method of rebalancing is to simply shift the fund future investments get applied to.
So, if this investor is currently making contributions into a bond fund in his Roth IRA, simply changing the investment into either the domestic stock fund or international stock fund should do the trick.
Keep this rebalancing activity to a maximum of 2-3 times a year, ideally only once. I've found over time that investors that don't visit their online account very often and focus instead on "Staying the Course" and increasing their savings rate do a far better job than the instable CNBC fanatics that always need to buy and sell based on the latest gloomy or rosy forecast they read about in the Wall Street Journal.
This method is SIMPLE and easy to implement, and I hope you have some nice takeaways to put to work in your own portfolio. For more information on this, take a look at my favorite books and pick up something like The Coffeehouse Investor for some very easy reading. The author even has a seriously tasty recipe for pumpkin pie...highly recommended!
What tips do you have for rebalancing?
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