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A (Re)Balanced Approach to Your Portfolio

You shouldn't tinker, but some situations demand retooling.

Rebalancing your portfolio is an essential but inexact exercise.

By regularly adjusting the amount of money you have scattered across various sectors and asset classes, you can prevent one investment from dominating -- and possibly devastating -- your portfolio.

Unfortunately, no adviser, planner, academic or know-it-all uncle can tell you exactly when and how often this needs to happen. You shouldn't just walk away from your investments for a quarter-century, nor should you constantly tinker with them and rack up hefty expenses. A ballpark estimate for how often you should rebalance your portfolio, as we'll see, is about once a year.

There isn't a set timetable, but there are situations that should prompt you to look at rebalancing. If your personal needs change (such as a sudden need for readily accessible, or liquid, investments), you should re-examine the way you've invested your money. Or if one blockbuster investment takes over your portfolio, you should think about reducing that position before it turns into a flop.

Regular Maintenance

If you're poring over how you've allocated your assets, there are a few standard concerns. When building a portfolio, you want to put your money in securities and asset classes that don't always move in the same direction. Stocks and bonds, for example, generally do not move in tandem. By adding bonds or cash to your portfolio, you will lower its return but also significantly reduce its fluctuations.

Investing in various sectors of the stock market, from transportation to technology, should also ease volatility. International stocks should do the same, provided you don't bundle all of your domestic and international holdings in one narrow sector.

Your portfolio must also be built to meet your needs. If you're young, you probably want your money to grow as much as possible. You can take on more risk because you can absorb a down year or two. If you're older, you probably worry more about risk and need some income from your investments.

You can't just leave your investments alone and check back in 20 years. If your technology stocks take off, they can take over your portfolio, adding more risk in the process.

But your allocations to different securities, sectors and asset classes also need to be flexible. You can't keep exactly 40% of your money in tech without endless tinkering.

Constant rebalancing would be costly and time-consuming. You pay commissions when buying and selling stocks, plus you might be realizing taxable gains in the process.

Jeffrey Molitor, director of portfolio review at


, suggests giving yourself some leeway by allowing for fluctuations of five to 10 percent in either direction.

If you initially put 60% of your money in stocks and 40% in bonds and would like to maintain that weighting, your stock allocation can go as high as 70% and as low as 50% before you have to worry about rebalancing.

Letting It Ride

You probably don't have to rebalance your portfolio as often as you think, particularly if you're young and have decades of investing ahead of you.

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If you don't have any looming needs that require a big cash outlay, you can leave your stocks alone, assuming that you're satisfied with their performance.

You don't necessarily need to prune your positions because they're doing too well. If you've got 20 years or more to invest, you have the luxury of letting them run.

At most, you may want to rebalance your portfolio once a year. A


study, published last year, found that you don't need to adjust your portfolio constantly to obtain the benefits of rebalancing. In fact, you're better off if you only rebalance every 12 to 18 months.

By waiting, you're saving time and money. In a taxable account, frequent rebalancing can mean you're realizing taxable gains.

You should think about rebalancing around the beginning of every year out of sheer convenience. In January, you'll have your tax records in front of you, and perhaps you'll have a bonus to invest as well.

Lifestyle Change

If your lifestyle changes considerably, your investment needs will probably change too. That means rejiggering your portfolio.

Say you and your spouse just had a baby and need a bigger house. If you're going to need cash for a down payment in two years, you don't want that money in tech stocks or other investments that are unpredictable. Instead, you want the security of short-term bonds or cash.

If you just inherited a huge sum of money that makes you financially secure for life, you can probably take on more risk with your investments. Before, you had to worry about protecting the money you'd saved for retirement. Now, you can have fun with it, whether that means buying a boat or buying B2B stocks.

Any event that alters your life, from a birth, a marriage or a death, should make your think about rebalancing your portfolio.

A Better Investment

Lastly, you may want to readjust your portfolio to unload a money-losing investment or take some money off the table.

But before you sell, you should have a clear idea of where that money is going.

Selling just to sell doesn't make any sense.

Dear Dagen aims to provide general fund information. Under no circumstances does the information in this column represent a recommendation to buy or sell funds or other securities.