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It’s that time of year again–time to throw out those New Year’s resolutions. By this time the health club should be cleared out and diet club meetings are back to the regulars. But there is one January task that you shouldn’t forget. It’s time to rebalance. And no, that doesn’t require any exercise equipment.
While I generally preach that you should decide on your investments and change the mix only rarely (when something really major changes in your life, like retirement), I don’t advocate a totally set-it-and-forget-it approach. Don’t look at your investments every day or you’ll shave years off your life, particularly in this volatile market. But don’t ignore them for years, either.
We all want to buy low and sell high, right? And most of us and the rest of the investment world end up doing the opposite. Rebalancing is the best chance you have of getting it right. Really, it’s simple but for some reason it requires intestinal fortitude. Here’s how.
Say you started out with an investment mix of 60% stock funds and 40% bond funds. But say the bonds have done pretty well this year and now your portfolio looks more like 54% stocks and 46% bonds. Move ‘em around—sell or exchange the extra 6% in bonds and buy more of the stock funds. Don’t tell me that bonds are doing better than stocks—that’s obvious. No, you DON’T want to hold on—you want to sell the high flyers (bonds, in this case) to buy what’s “cheap”—the stocks. (no specific investment recommendations intended). As with lottery tickets, it’s not a win unless you collect it! If you’re retired, this is also the time to re-fund your spending account.
Sure, sometimes one asset will keep going up, but over the long run, rebalancing has been shown to eke out better returns and protect you from the overvalued hysteria that inevitably hits certain classes of investments. So, screw up your courage and make those changes. Really, it doesn’t hurt much.
