November 2, 2103

You may have heard, “rebalance your account as needed to reset your asset allocation.” What does this mean? How often?

2 thoughts on “November 2, 2103”

  1. Katherine Graham says:

    It means that you should rebalance your investments so that your asset allocation is what you desire. Also, you should only rebalance your retirement account to avoid negative tax consequences. Another way to rebalance your portfolio is add money to specific accounts. Lastly, you should rebalance your account every few years.

  2. Mike Finley says:

    Well said, Katherine. Let’s recap.

    Rebalancing forces us to sell our winners (what has gone up recently) and buy our losers (what is currently not doing well) to bring us back to the asset allocation we desire. This sounds easy, but it can be hard to do. Human beings prefer to buy more of their winners as well sell their losers. This is a mistake as you chase performance (put more money toward the recent successful). Chasing performance is a sure way to lag the markets over time as you continue to “get in” after the big money has been made. Do not play this game you cannot win.

    Katherine was right on target with her recommendations. Rebalance in your retirement accounts to avoid tax consequences and/or add to taxable accounts outside of retirement or in retirement to get your allocation back to where you want it.

    Here is a general rule of thumb to follow when considering when to rebalance. Check your account (this should encompass all of your money in all of your accounts) 1 time each year. How much is it out of balance? If it is less than 5%, (you desire a 80% stock allocation to a 20% bond allocation and you see that your allocation is now 83% to 17%) I would leave it alone. If it is over 5% (87%/13%) I would rebalance back to the 80%/20% you desire. The key is to tinker with your account as little as possible. Less is more in this case.

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