That means even if stocks are down when that date comes around, you should shift more of your portfolio into stocks until you are back to the right balance. In essence, you're selling winners and buying losers. But this is where many investors go wrong, according to Greg Shultz, a principal at Asset Allocation Advisors, a financial planning firm located in California.
"The reality is that most investors won't reallocate," says Shultz. "If stocks go up, they feel good, so they won't sell. Conversely, if stocks get low so that they are below their target allocation, they won't reallocate and buy stocks."
Shifting the money in your portfolio to maintain your target allocation is sound financial strategy. Meanwhile, sophisticated investors can take rebalancing one step further, drilling down within their stock allocation, for example, to look at diversification among sectors of the economy.
An individual sector can decline significantly more than the rest of the market -- the financial sector of the
S&P 500 is down more than 50% since early October, compared with a 20% decline in the overall S&P 500 index.
That doesn't mean you should blindly shift more money into the financial section of your portfolio. But you should be aware of how the different parts of your portfolio are straying from your initial allocation and make sure to rebalance at least once a year.
If you don't have the confidence to put more money into equities as the stock market dives, you can let the pros do it for you.
Funds such as the
Vanguard-Wellington Fund set a target allocation and rebalance automatically as needed. You can invest your money and not worry about it -- at least until your investment priorities and, therefore, your allocation strategies change.
Peter McDougall
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