If you haven't kept your New Years' resolution to rebalance your portfolio, its mix might be seriously out of kilter. You need to right the ship to reduce risk.
You made a New Yearsâ€™ resolution to rebalance your portfolio and now weâ€™re into March and you havenâ€™t done it yet. Maybe youâ€™re asking yourself whether itâ€™s really necessary. Most financial consultants advise taking a look at look at your mix of stocks, bonds, and cash at least once a year â€“ advice that could be crucial after last yearâ€™s roller-coaster performance in the markets. The dips and swells in the markets may have put your portfolio mix seriously out of kilter and you need to right the ship to reduce risk.
Rebalancing assumes that youâ€™ve set a target asset allocation that youâ€™re comfortable with. As a rule of thumb, financial gurus suggest that the longer your time horizon, the more you should have in the stock portion of your portfolio. On the flip side, the closer you are to needing to tap your stash for income, the more you should have in bonds and cash reserves. Once youâ€™ve set your target allocation, the next step is to rearrange your mix to meet the targets, switching assets from areas that are over the target to areas that are underweighted.
Some investors avoid rebalancing because it often means selling off assets that have done well to buy those that may have fallen on hard times. If youâ€™re one of those investors, it may help to remember that asset allocation isnâ€™t about making money, itâ€™s about reducing risk. When stocks hit their lows last March, investors who stuck to their stock allocation were able to benefit from the subsequent recovery, while those who joined the panic selling lost out.