Balancing Act: It’s Time For Some Portfolio Management

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As 2011 approaches and your year-end task list lengthens, we bring you a special PSA: Don’t forget to rebalance your investment and retirement portfolios. Rebalancing a portfolio is kind of like getting a haircut for your investments—you start off with the style you want, but it gets pretty messy unless you groom it every so often. The LearnVest deadline for visiting the financial barbershop is December 29th, but we know how much it sucks to pore over investments when you’d rather be enjoying Christmas and New Year festivities, so we recommend that you do this now. We’ll show you how.

Think About Whether You Should Try Out A New Financial Hairstyle

Just as you might mix up your ‘do as seasons and trends change, evaluate whether you should use a different strategy in your portfolio because something has changed in your life situation, like your family, life goals, career, or anything else. If not, you’ll still need to go in for a trim. To find out whether your needs have changed, and to get a suggested breakdown of how you should divide your investments, take our LV Risk Tolerance Quiz.

Don’t Be Afraid To Jump In: The Economy May Be On The Rise

Just a few weeks ago, Warren Buffett, the investing guru who is also the second richest man in America, was quoted as saying, “We will be better off two years from now than we are now unless there is some nuclear, chemical or biological event. But the one thing I’m absolutely sure of is that the best years of America lie ahead.” So, take heart, and don’t use the bad economy as an excuse not to save up for retirement or other big purchases like a home or graduate school. If you don’t have a retirement or investment account yet, we suggest opening one now (for more detailed guidance on how to start, check out our Investing Bootcamp).

Rebalancing Step One: Figure Out What You’ll Buy And Sell

When you start investing, you’ll have a certain mix of investments like stocks and bonds. But, if some of those investments make more money than others, your original percentages will become skewed. So, when you rebalance, you’ll be buying and selling investments in order to set your percentages back to their original values. For example, say that your original portfolio was 50% invested in large cap stock index funds, 25% in international stock index funds, and 20% in small or mid cap stock index funds, and 5% in bonds. Now say that your large cap investments have gone up in value, now making up 75% of your portfolio. You’ll have to sell 25% of them and distribute them to the other categories to get back to the original formula.

Remember Costs Of Transactions

Buying and selling lots of investments may sometimes mean lots of different transaction fees. As a result, we are big fans of no-transaction-fee index funds. To find these funds, use your brokerage’s online tools. Usually, you can find this option in an advanced search for mutual funds on the brokerage’s website.

Remember, if you need more help navigating all of these terms and how exactly to make these transactions, the LV Investing Bootcamp can help. We’re also here for you; if you have any questions or stories to share, comment below or email us at feedback@learnvest.com.

  • Anonymous

    Not gonna lie: Optimism from Warren Buffett gives me hope.