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Wall Street Steward Blog

Rebalancing Revisited

As we approach the end of the year, many things are probably at the top of your list: shopping, a winter vacation, charitable giving, etc. Well how about a rewarding gift you could give yourself, that costs NOTHING? Let me suggest rebalancing your investment portfolio.

From 2009 through late September, stocks have averaged 16.7% per year, while bonds have only appreciated 4.7% per year. Many times this type of market performance can create an unbalanced portfolio that might not fit your risk tolerance. Consider the effects of this performance on a moderate portfolio (50% stocks/50% bonds), assuming index returns and no rebalancing.

S&P 500 +26.5% (2009), +15.1% +2.1% (2011), +16.0% (2012), +20.9% (2013)
Aggregate Bond +5.9% (2009) +6.5% (2010), +7.8% (2011), +4.2% (2012), -2.0% (2013)

2009 September 2013
$100,000 account $166,328 account
50% stocks ($50,000) 63% stocks ($104,175)
50% bonds ($50,000) 37% bonds ($62,153)

While your total investment has grown, what started as a moderate portfolio has become more aggressive. Because stocks have outpaced bonds, you no longer have a 50/50 balance. Your portfolio has become almost 2/3 stocks. When this happens, your investments have become more risky, and the only way to fix it is to rebalance.

Taking the account total, which in this case is $166,328, and multiplying it by your initial allocation will give you the new target amounts for each asset class, if your appetite for risk has not changed.

$166,328 × .50 = $83,164 in stocks
$166,328 × .50 = $83,164 in bonds

You may be thinking, “Why sell something that’s done well to buy something that hasn’t done as well?” Investing may often seem counter intuitive, which means you usually need to do the opposite of what your emotions tell you. Selling the highest returning investment to buy something returning less is not easy, but it could make the difference between reaching your goal or falling short of it if there is a swing in the markets.

Rebalancing should become a regular gift you give to yourself, because the markets are typically not static.  Call us and we’ll be happy to give you some direction.

MG

S&P 500 and Aggregate Bond Index are unmanaged indices which cannot be invested into directly. Unmanaged indices returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. Past performance is no guarantee of future results.