Submitted by admin on Thu, 11/18/2010 — 12:15

Rebalance: What does that mean? Why should I care?

Once you have focused on a personal investment strategy, it’s important to review your portfolio annually and return it to the proper mix of stocks, bonds and short-term reserves you’ve established. This is referred to as portfolio rebalancing … and it’s an important part of sticking to your plan.

Why is portfolio rebalancing important? Because when markets change, your portfolio changes as well.

Need more confirmation? Watch this video: Is it time to rebalance your portfolio? Vanguard’s Stephani Smith explains why rebalancing should be an important part of your overall investment strategy and offers examples on how – and how often – to do so.

Let’s say you complete the Investor Questionnaire and pinpoint your investments as follows:

Now let’s say stocks take off and you make a big profit. That’s great – you’ve just added to your retirement savings. But don’t forget to keep the big picture in mind – the profits you made on those stocks have probably changed your original investment mix. If you determine your original investment mix is still right for you, you’ll need to reassess occasionally to make sure the percentages remain unchanged.

Do you see how this investment mix has gotten out of sync with the original plan? The portfolio is now over-weighted in stocks and under-weighted in bonds. It needs to be balanced to realign it with the original mix.

Steps for rebalancing.

Vanguard makes it easy for you to rebalance your account anytime you want. To do so, follow these steps:

1. Log in to the secure area of vanguard.com – you’ll need your user name and password.
2. Go to: Change Investments > Rebalance Funds and follow the prompts.

It’s tempting to let the good times roll, but the purpose of establishing your investment mix is to achieve the best returns with an acceptable level of risk. Remember to stay focused on the big picture – your retirement savings.

Review your portfolio at least once a year to determine if rebalancing is necessary. As a rule of thumb, if your original allocations change by 5% or more, you may want to consider rebalancing.

A rebalancing lesson from the dot com era

Do you remember the stock market crash of 2000 when the “dot com bubble” burst? Some investors put a lot of the money from their portfolios into technology stocks. They saw they were making a nice profit and figured: Why not leave all of the money I’ve made in these stocks? After all, look how well I’m doing!

But as we all know, every boom usually has a bust – and technology proved to be no exception. What do you think happened to those investors who didn’t diversify their portfolios? Gradually, their investment mix became heavily weighted in technology stocks. When the bottom fell out, so did a lot of their profits. A good safeguard is to rebalance your investment portfolio periodically so you stay on track with your retirement goals.