The financial markets have been roiling lately, a sign that a change of direction might be about to occur, or already is underway. However, crystal balls tend to be more cloudy than clear. No one consistently appraises the markets accurately.
No matter the market direction, financial advisers are not timid about telling you to rebalance your portfolio. But KPLU financial commentator Greg Heberlein says it's OK to ignore that advice.
Let's define a balanced portfolio. How much in stocks and fixed income – bonds, CDs, etc. – should you own?
The rule of 100
Complicated formulas exist. But the easiest and most common is the rule of 100. Subtract your age from 100 and that is your allocation to stocks.
If you’re 40 years old, you should have 60 percent of your investments in stocks. So rebalancing means that if your portfolio is 55 percent stocks, you should up your allocation to 60 percent.
Should you rebalance quarterly or annually?
Greg says rebalancing, for most of us, is poppycock.
Most investors always own more stocks than the rule of 100 suggests. A large number of mom and pop investors are averse to learning the ins and outs of the bond market.
The five year rule
Greg is a big fan of this simple strategy: if you need the money in five years or less, keep it out of stocks. Otherwise, stocks held five years or longer almost always are worth much more in the long run.
The stock market crashed in 2008 and bottomed in 2009. But by this year, stock values wiped out all of their losses and have reached record highs.
Let’s say your stocks now comprise 70 percent of the total you’ve invested. That means they’ve been doing quite well.
Time to rebalance? Hardly.
Cut your losses short, let your profits run
Another Wall Street rule to consider is “cut your losses short, let your profits run.” Most who bought stocks in 2009 and 2010 began to see big gains almost right away. Had you sold to rebalance your portfolio then, you’d have missed out on the biggest run in this bull market.
One of the worst ravages to market profitability is cost of investments. Sales charges, whether for individual stocks or mutual funds, reduce your returns. Buying and selling chunks of your investments once a quarter or once a year is a good way to see your gains deteriorate.
But there is a way to rebalance your portfolio without having to cash in some of your investments. Do it with future contributions.
If your portfolio is weighted too heavily toward bonds, for example, put your new money into stocks. Keep doing that until you achieve the balance you desire.
Slimming down on stocks as you age is a good idea, because you want less risk in your nest egg as you get closer to needing it. But switching in and out every quarter or every year? No way!