Make Sure Your Portfolio Is Rebalanced

Physician's Money DigestJune15 2003
Volume 10
Issue 11

Good investing requires more than just choosing the best stocks for your portfolio. It also requires rebalancing your portfolio regularly (ie, strategically redistributing the assets within the respective investment classes to keep the portfolio's objectives in line with your original investment plan). If a portfolio is not actively managed, money can be wasted and earning opportunities can be missed.


Let's think of investment planning as an automobile, which transports an investor toward their financial goals (eg, a secure retirement). The investment portfolio is its motor, the asset allocation model is the fuel mixture, and the assets invested are the fuel. The more efficiently the motor (ie, the investment portfolio) runs, the greater the speed the vehicle travels toward the destination.

If the fuel mixture (ie, the asset allocation) is too rich, the motor will waste precious fuel. On the other hand, if it's too thin, the car (ie, the investment plan) will have trouble achieving forward momentum.


Now, let's imagine that the mountains and valleys between you and your destination represent the ups and downs of the market. Changes in altitude will require the fuel mixture to be adjusted accordingly. Failure to make adjustments may bog your motor down or force it to burn more fuel than necessary.

Investors who rebalance their portfolio at regular intervals may arrive at their destination sooner and with more fuel in their tank. In addition, the distinction between "not doing poorly" and "doing exceptionally well" may depend on the frequency of your portfolio adjustments. Markets experience corrections, and the wise investor should make adjustments to their portfolio accordingly.


Portfolio rebalancing should also manage to reduce your portfolio's volatility. John Gardner, president of Equity Research and Portfolio Evaluation, calls this "portfolio optimization." Gardner explains, "The goal is to increase returns while decreasing exposure to risk." The longer a portfolio is left unbalanced, the more compromised its asset allocation may become. Two repercussions associated with a compromised allocation: overexposure to the downside and underexposure to the upside.

Many wire houses and brokerages (both discount and full service) don't offer active portfolio rebalancing. Generally, an investor can only get this level of service from an advisor or a firm that offers private portfolio management. Learning the finer points of effective portfolio rebalancing can take years of practice. It's likely a task that an experienced financial professional can best help you with.

John Valentine is founder and

president of

, headquartered in San

Ramon, Calif. He welcomes

questions or comments at 800-

88-RETIRE or, or


Valentine Capital Asset Management

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