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How to Rebalance Your Portfolio

By Justin Krane

Republish: EasyPublish™ Published: 18Mar2012 Word count: 627 Viewed: 41 time(s) Get Free Content For Your Site

Get a Financial Tune Up. Rebalance Your Portfolio at Least Once a Year.

Ever hear the expression: "Economists have predicted 15 out of the last 5 recessions?" Eventually they will be right but when? As an investor, when should you really listen to them? The key is you don't have to if you rebalance your portfolio from time to time.

Goldman Sachs has suggested that investors will sell $25 billion dollars out of bonds, take that money and pour it into stocks, in just 3 days! Holy cash!!! Goldman is saying that investors think they can make more money in stocks than bonds going forward…

And so far, they have been right! The Fed and the European Central Bank decided to loan the European banks some serious cash at crazy low rates. These European banks must have really been in serious danger — as in going out of business like Lehman Brothers did. Now that they have more money, investors feel more comfortable buying stocks and taking some risks.

I believe that stocks will most likely beat bonds for the next 10 years. I am not suggesting you go cold turkey (How was your Thanksgiving?) by selling all your bonds and buying stocks. You need to evaluate your own individual tolerance for risk and your own goals. It will most likely be a bumpy ride. As they say, if you can't take the heat get out of the kitchen. So why could stocks beat bonds going forward? And why might it be worth your while to rebalance your portfolio?

Interest rates on bonds are crazy low and when they go up, bond prices will go down.Stocks pay dividends and there are some good yields out there. You can get paid while you wait for stocks to go up.The public has given up on stocks, pulling money out and going to cash. Does anyone talk about the stock market at cocktail parties anymore? Talk about a contrarian indicator!The Fed is on the investor's side, encouraging them to take money from cash and CDs, paying literally nothing, and to invest in stocks. So how exactly do you rebalance your portfolio?

First, rebalancing is when you bring your current allocation back to your target allocation. For example…

On Jan 1, 2008, if you invested $100 into the S&P 500 and kept it in until November 25, 2011, you would have a whopping $84.60!!! Oh geez!

On Jan 1, 2008, if you invested $100 into the Vanguard Total Bond Market Index, and kept it in until November 25, 2011, you would have a whopping $126.29!!!

Disheartening, right? So, let's say you want to rebalance your portfolio and you want your target allocation to be 50% stocks and 50% bonds. You now want your current allocation to get back to your initial 50/50 allocation.

Step 1: Calculate the total value of your portfolio: $126.29 + 84.60 = $219.89

Step 2: Divide $219.49 by 2 to get your new target allocation. $219.89/2= $105.45

Step 3: Take $126.29 -$105.45 = $20.84. So you need to sell $20.84 of bonds and buy stocks.

You are only taking $20.84 from bonds to get back to your target allocation. You are buying what has gone down and selling what has gone up! Everyone is going to think you are crazy, including your know-it-all friends who think they know everything about investing. It takes guts. This is very hard to do in a volatile market, especially when stocks go down. Why? Because you may rebalance your portfolio and buy stocks and they could go down further. Eventually, over a long period of time (like 25 years!!!), this stuff usually works.

Keep in mind that before you rebalance your portfolio, you need to set a target allocation and start somewhere.

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