Jul 24, 2013

All Time Highs! Act Now to Protect Your Nest Egg

With markets at all time highs, now is as good a time as any to rebalance your portfolio.  But how do we go about doing this?
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:

-Roth:                    $47,290
-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)
July 2013877193407525496

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?

Tortoise Banker
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  1. I keep my portfolio 100% invested in equity so I don't have to rebalance ;-) lol

    I actually buy more consumer stocks when we reach all time highs. They provide great dividend and will not take the hit as bad as other stocks when the drop will happen :-)

  2. I think the key point you make is to rebalance just once or maybe twice per year. It's so easy to get sucked into checking investments every day--or multiple times a day--and then tinker. This isn't investing--it's gambling!

  3. It's crazy what the markets are doing now. I'm deploying a slug into a structured note with 30% downside protection, and 100% participation for a guaranteed 15% min return over 5 years. Not gonna make me rich, but not gonna lose either.

  4. I re-balance only around once a year, but I do check my investments more than that. It's difficult to avoid!

  5. I completely agree with "staying the course." I check my investments twice a week but only make a change once a year, and only if I need it.

  6. Those that don't want to bother with re-balancing (out of laziness or ignorance) can choose "retirement target" mutual funds that do that for them automatically. I currently take that route (and I tell myself it's because of the laziness and not ignorance, but I could be wrong about myself!).