Re-Balance Your Portfolio
Research for Online Investors

This originally appeared on 12/18/09 in MarketToday.

by John Dalt

Re-balancing your portfolio is an important tool.  Many investors do this at the end of the year.  Many professional money managers rebalance their holdings during market extremes. 

Re-balancing is simply reviewing your stocks and the amount of equity each represents in your portfolio. We suggest each position should represent approximately 5% of your total long-term  funds. If you only owned two stocks, and stock “A” has doubled and stock “B” is down 10% in the last year, you would sell 27.5% of stock “A” and buy 61% more of stock “B”. This is only if both started out with equal allocations in 2009

Another way to do this is divide your total long-term portfolio’s value by 20 Then sell or buy each of your holdings to the optimum position size of 5% of the total.

The reason we do this is to keep all positions equal with each other, so a 15% gain in one stock has equal weighting against your other positions.  This also serves to take money off the table of your biggest winners, and reallocate it to stocks you believe in, but may have lagged the market in the past year.

Here is the math:

Total portfolio value today:   $100,000.00

Divided by 20       =                      5,000.00

Optimum stock size position:   $5,000.00

If you are not fully invested, do your homework and identify stocks you want to own and the price that represents value for you. Or, even better, subscribe to our Long-Term Portfolio and we will take a lot of the work out of it for you. We beat the S&P 500 by more than 25% year over year in 2009, beat it in 2010 with a 14.9% return, and are beating it again this year.

One other consideration is if you should own bonds in your portfolio.  Many suggest a percentage allocation that increases with age.  This removes volatility from your portfolio as you get closer to retirement and may depend on withdrawals to pay living expenses.  You should decide this for your particular circumstances.

Interest rates are currently low on fixed-term bonds, and may not represent a good option for long-term investment.  We expect interest rates to increase in the next year, with long term inflation baked into the economy by deficit spending and growing public debt.  With this in mind, one should keep any fixed term instruments as short as possible.  This allows you to renew at a higher rate later.

The question that one must ask, "Are my returns greater than the rate of inflation?"  If not, the money returned to you at maturity is worth less than when the bond was bought.

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