20 Mar What you need to know about rebalancing your portfolio

 Q. I know I’m supposed to rebalance my retirement investments at least once a year, but I don’t really have lots of time to research but I also can’t afford a money manager. Is there a middle ground?

A. Rebalancing your portfolio is important because it makes sure your money is invested according to your long-term plan.

The concept is simple. You sell the portion of your investment that has appreciated above its target allocation, and with the proceeds, buy more of your investment that has depreciated below its target allocation, said Edward Leach, a certified financial planner with Highland Financial Advisors in Riverdale.

“Essentially you are buying low and selling high, a sound investment strategy,” Leach said. “However, in the case of rebalancing a simple concept does not always translate to a simple task.”

If you want to avoid hiring a money manager and do not have the time to do a significant amount of research, you should keep it simple, he said. This starts with deciding on the foundation of your investment strategy — your asset allocation.

Leach says this exercise that may help you get on your way:

First, decide on the right mix of stocks and bonds based on your time horizon and risk tolerance. Here are three basic examples:

A conservative portfolio could have 50 percent bonds and 50 percent stocks.
A balanced portfolio could have 40 percent bonds and 60 percent stocks.
A moderately aggressive portfolio could have 30 percent bonds and 70 percent stocks.

“Next, find low-cost index funds in the form of exchange-traded funds (ETFs) or mutual funds that will capture broad areas of the market,” Leach said. “Vanguard and iShares have a tremendous amount of low-cost retail investment options that may meet your needs.”

In order to keep it, he recommends keeping the number of investment options you choose to a minimum, maybe three to five, Leach said.

Then, using the balanced allocation example of 40 percent bonds and 60 percent stocks, let’s assume you selected the following:

40 percent: Global Bonds
35 percent: Total U.S. Stock Market
25 percent: Total International Stock Market

“If your retirement accounts were invested this way, rebalancing can be an easy task,” Leach said. “You would buy and sell the right amount of the three investments to get you back to your target allocations without doing any research.”

He said you should do this at least every six months to ensure against market fluctuations altering your asset allocation.

Indeed, the more frequently you rebalance your investments, the better risk-adjusted return you will have, said Brian Power, a certified financial planner with Gateway Advisory in Westfield.

He said if you don’t have the time or the interest to make sure you rebalance, you should consider working with an investment firm that offers either pre-set risk-based portfolios that the firm will rebalance for you for an investment management fee, or use target date mutual funds. Target funds are a “fund of funds,” which owns several funds, and is usually very diversified across a good range of asset classes that will be rebalanced within the fund for you. These will also migrate to be more conservative as you approach the “target date” of the fund.

There are many low-cost target funds to choose from, but there are some drawbacks.

“You will only see the name of the fund on your statement or online account, which means the underlying funds that make up the target date funds are not listed out for you,” Power said. “So you don’t know what you own unless you read the prospectus and annual reports.”

Also, most mutual fund companies that offer target date funds only use their own mutual funds as the underlying funds. This doesn’t give you the best diversification and “best of breed” among asset classes, he said.

So that means your choices would be more limited than if you worked with an investment advisor who manages your money for you.

“A risk based portfolio that is rebalanced regularly for a fee does not usually restrict the portfolio to one asset management firm and in most cases will use a combination of mutual funds and ETFs,” Power said. “Because these portfolios are looking to have `the best of breed’ representing the different asset classes, you may get better risk adjusted performance to help offset the investment management fee.”

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This post first appeared in March 2015.