The following piece is by Bob French, who serves as Director of Retirement Research at McLean Asset Management.

Investing isn’t simply picking the best funds or building your perfect portfolio. Keeping your portfolio in line over the long term is just as important (if not more so).

Markets move. That’s what they do. If they didn’t, they wouldn’t reflect our ever-changing world.

As a result, your portfolio will drift over time from being in line with your goals and risk comfort level to something other than what you originally intended.

Click here to download Bob’s ebook “Making the Markets Work for You.”

Occasionally, you’ll need to rebalance your portfolio to bring everything back into balance and make sure you’re taking the level of risk you want (or at least close to it). If you don’t rebalance your portfolio periodically, your portfolio will quickly morph into something you don’t want.

But rebalancing comes at a cost. It often comes down to selling “winners” to buy “losers,” and nobody enjoys that. But other more tangible costs exist, as well.

Rebalancing usually means incurring real costs – trading costs and additional taxes. Depending on how you put your portfolio together, you will often need to pay commission charges (or other direct trading costs) to sell overweight assets and buy those that are underweight.

Even if you don’t need to worry about those direct trading costs, capital gains taxes are still a concern (assuming you aren’t rebalancing in your 401k or IRA) since you’ll be selling the stuff that rose in value.

But don’t let those costs be a deterrence – you need to rebalance your portfolio periodically. Yes, I’m normally the one beating the drum on the evils of investment expenses, but these are worth it.

The most important thing about your portfolio is the amount of risk you’re taking. Rebalancing allows you to keep your risk dialed into the right level.

Up until now, we’ve been talking about rebalancing in a static portfolio. In the real world, portfolios aren’t normally static. They’re normally fairly kinetic, whether you want them to be or not.

While you’re working, you are (ideally) saving for retirement, which means you’re making regular deposits into your investment portfolio. After you retire, you’re living off your investments – at least partially – meaning you’re taking money out of your investment portfolio.

But you can actually wring even more benefit out of the money going in or out of your portfolio. You can use these cash flows to continually rebalance your portfolio.

When you are adding money to your portfolio, you want to make sure it is going to those asset classes that are underweight so you bring them closer to target. When you pull money out of your portfolio, you want to make sure it is coming from those asset classes that are overweight so you bring them closer to target.

Depending on your situation, this likely isn’t going to be a magic bullet. You probably won’t be able to do all of your rebalancing this way. But you can certainly get ahead of the game this way.

You were already going to put that money in, or take it out, so why not take advantage of it?

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  3. How often should I review my financial plan? on December 20, 2016 at 10:51 am

    […] time to check your financial plan. But you should look at it at least annually (for instance, when you rebalance your investment portfolio), as well as whenever something significant happens in your […]



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