03 Aug Rebalancing your portfolio
Photo: kstephens/morguefile.comQ. How often should I rebalance my portfolio? I’ve heard every six months or every year.
A. Rebalancing a portfolio is essential for every investor.
Sometimes your investments will lose value and sometimes they will gain in value. When either happens, your asset allocation — the percentage of your overall portfolio invested in different parts of the market — will change.
How often you should rebalance — sell some of the investments that have gained in value and add more to the losers — depends.
Jerry Lynch, a certified financial planner with JFL Total Wealth Management in Boonton, said for most portfolios, he does it by percentage.
“Let’s say I have 10 percent allocated to large-cap value, and it grows to a larger percentage, say, 15 percent, that automatically triggers a rebalance,” he said.
If you’re doing it manually, he’d recommend every six months.
He said many 401(k) providers offer this kind of portfolio movement annually, semi-annually, quarterly or monthly. Lynch said of those options, he prefers the six month timeframe.
“It allows sectors to pop and you get some growth there, while not allowing your portfolio to get too out of whack,” he said.
When you review your funds, he recommends you follow these guidelines.
Generally, keep what you have unless they’re significantly underperforming, and don’t chase a return that’s just a little higher.
When you compare your investments, compare them to their peers. Don’t forget to look at their expenses compared to their peers, and how consistent the performance is.
When Lynch talks peers, he means you should compare apples to apples, not oranges or bananas. That means you shouldn’t compare your large-cap fund to a small-cap one because the performance shouldn’t be the same.
If you decide to rebalance more frequently, Lynch said, make sure you’re giving the fund manager enough time to add value.
“Sometimes you think your manager is good because they’re in the right place at the right time, or bad because they’re in the wrong place at the wrong time,” he said. “You need to evaluate them over time and in context with how their peers are doing.”
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This story was first posted in August 2015.
NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.