CHICAGO (Reuters) – To some, spring means cleaning, renewal and yard work. For nervous Nellies like me who still see the ghost rider of 2008 in my rear-view mirror despite the market being up sharply so far in 2012, it means rebalancing my portfolio.
There’s nothing sexy about rebalancing. You simply plod through your account statements and reorient your nest egg toward your objectives while lowering risk. The crux is that if you do it right, you are purchasing less-favored assets and selling higher-valued securities. In other words, you are buying low and selling high, which is what most investors consistently fail to do. Far too many folks buy on the way up and hope that good times will continue indefinitely, thus ignoring the downside risk.
If you don’t rebalance, your portfolio gradually becomes dominated by higher-risk and potentially over-valued assets. When the eventual correction or crash comes along, the resulting fall is much steeper – if you haven’t rebalanced.
I took a peek at my portfolio recently, and due to the bull run of late, I noticed that stocks comprised almost 58 percent of our joint 401(k) and individual retirement account holdings. Since my wife and I resolved that we’d never let stocks comprise more than half of our portfolio, we’ll have to make some adjustments. We still haven’t completely recovered from the train wreck known as the 2008 meltdown. As you can imagine, we’re more cautious these days.
For my family’s portfolio, based on my age of 54, I like to invest at least half in fixed-income. As a rule of thumb, your age should roughly match your target fixed-income allocation, if you’re a moderate to conservative investor.