Asset Allocation: Part 5 of 5
by Retire Fast.
This is the last in a series about asset allocation. In the last par $ of this series, you determined your ideal asset mix. In Part 5 you will learn when and how to rebalance your portfolio.
In addition to evaluating your ideal mix after each life event or every five years, you should also rebalance your portfolio annually. Rebalancing your portfolio simply means returning each asset category to the percentage you initially set. If you have set up your initial allocation properly, no drastic revisions to your portfolio should be needed.
You will need to rebalance your portfolio whenever the weight of any asset category deviates from the original by more than 5%. The graphs below are sample asset allocations. The graph on the left shows an ideal mix at the beginning of 2017 and on the right is a potential year-end mix.
The following formula should be used to determine a 5% deviation from a percentage.
Because some of the categories deviate from our established ideal mix by more than 5%, some rebalancing is needed to bring the portfolio back in line with the established ideal mix. Therefore, based on the ideal mix graph shown above, the table below shows those categories that need rebalancing. These include selling some of your small cap stocks and adding to your bonds and large cap stock positions. Also, the cash should be used to add to the international stock category.
The benefits of rebalancing your portfolio annually are that it forces you to take profits out of asset categories whose prices have increased and reinvest that money in assets that have the potential to be more profitable. Rebalancing also saves you from taking on too much risk. Historically, bonds and stocks have moved opposite of each other. Thus, by rebalancing your portfolio you will avoid one asset class from becoming dominant in your portfolio. The people, who survived the technology bubble of 2000, used rebalancing when the technology stocks started to overtake their portfolio. Their portfolios are better for it.
Our goal for this series Part 5 was to have you understand asset allocation thoroughly, in easy to understand terms. I hope you have learned something new about asset allocation and how to apply it to your individual needs.
In our next blog, we will explore how your portfolio returns have been out of the park. Now What?
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Asset Allocation Series by Retire Fast LLC., (Companies and mutual funds mentioned in our blog are used as illustrations or suggestions for study and are presented for educational purposes only. They are not to be considered as endorsed or recommended for purchase by Retire Fast.) Investors should conduct their own review and analysis of any company of interest before making an investment decision. Investors should further consult their accountant, tax expert and/or financial advisor before making any investment decisions. Neither Retire Fast.. nor its content providers are responsible for any damages or losses arising from any use of this information. Copyright © 2018 Retire Fast, LLC. All rights reserved.
