Real Life Resources

A Balancing Act

With all the ups and downs in the market, any portfolio can veer off-course. But some simple adjustments can put things back on track.

The Best-Laid Plans . . .

Everyone knows you shouldn’t put all your eggs in one basket. It’s too much of a risk. Drop it and splat! There go all your eggs.

  1. It’s the same with your portfolio. You don’t want to have all your assets in just one kind of investment.
    1. A typical asset allocation: 60% stocks, 30% bonds and 10% commodities.
    2. It’s unlikely that the assets in all three “baskets” — stocks, bonds and commodities — will go down at the same time.
    3. Various types of assets usually react differently to the news of the day or market conditions.
  2. By spreading around your assets you can manage risk (which we’ll define as volatility) while you aim for growth.

In general, stocks are more risky than bonds, and prices of commodities —such as oil, industrial and precious metals— are subject to big swings.

Achieving a Delicate Balance

As time passes and the markets move higher or lower, your holdings can get skewed in a certain direction. Here’s what can happen:

  1. When the stock market is roaring, that 60% weighting in equities can balloon to 65% or even higher.
    1. Consequently the percentage of bonds and commodities shrinks.
    2. Now your portfolio’s makeup has changed, and so has its risk profile.
    3. Remember the glory days of the NASDAQ when stocks doubled every few months? Oops — we know how that played out.
  2. When the percentages get too far out of line, it’s time to rebalance your portfolio so that it returns to its original composition: say, 60% stocks, 30% bonds and 10% commodities.
    1. Calendar rebalancing is simple but may not adequately address market behavior.
    2. Some favor action with a move of over 5% each way in the portfolio allotment, i.e., stocks can fluctuate within a 55-65% band; bonds within 35-45%.
    3. A 10% move can serve as an automatic trigger to rebalance, with less than that for volatile classes like commodities.

The Bottom Line

It’s not just a theory. Rebalancing can add up to real money over the years. Look at these figures:

  1. A standard portfolio of 60% stocks, 30% bonds and 10% commodities rebalanced quarterly grew from $100,000 to $451,000 in the 20 years between 1992 and 2012. (Of course we must take the power of compounding into account!)
  2. Without rebalancing, the identical portfolio grew to only $413,000 in the same time frame.
  3. Results: The rebalanced portfolio had a 12% greater profit.
    1. Overall, rebalancing led to a 21% improvement in the reward/risk ratio, allowing investors to sleep a bit easier at night.
    2. As always, transaction costs and tax implications must be factored in.
  4. Workplace accounts like 401(k), 403(b), pension plans and the like often fly under the radar. But they need to be rebalanced too.

Like most things in life, portfolios need regular attention to function at their best. Check in with your financial adviser to make sure your accounts are primed for top performance.


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Gerstein Fisher
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