Course 305: Rebalancing Your Portfolio
How to Do It
In this course
1 Introduction
2 What Rebalancing Is
3 Why Bother?
4 How to Do It
5 Our Rebalancing Guidelines

Convinced? Good. Now comes the sticky part: figuring out just how to rebalance.

Rebalancing would be a cinch if all your money was in one account. But you may be investing for one goal via various vehicles. For instance, you may have some retirement assets in an IRA, more in an employer-sponsored retirement account, and even some in a taxable account.

If these accounts are all funding one goal, they are, for all intents and purposes, part of one portfolio. So when you rebalance, you're not just going to rebalance your employer-sponsored account. You should rebalance across all of these accounts simultaneously.

Here's how:

Step 1: Recall your target portfolio mix. 

You included the details of this mix in your Investment Policy Statement. (If you haven't developed your investment criteria or created your Investment Policy Statement, review Portfolio 108 and download Morningstar’s Investment Policy Statement Worksheet at http://news.morningstar.com/pdfs/Investment_Policy_Worksheet.pdf. (Note: The worksheet is available as a PDF file. You will need Adobe® Acrobat® Reader to view and print it.) This was the blend of asset classes and investment styles that were going to allow you to reach your investment goal.

Step 2: Compare your target mix to your current mix.

Consult your portfolio statements or online tracking tool. Morningstar.com can help with its Instant X-Ray and Portfolio Manager tools. Just enter a new portfolio or retrieve one you have already saved on Morningstar.com.

Step 3: Determine where your investments are out of whack.

Begin by seeing how your cash and bond positions have shifted relative to your stock stake. Very often, your positions in these areas will shrink relative to stocks because, in general, stocks as a group outperform cash and bonds.

 

Next, examine your style-box mix. Do you have a larger stake in small-company stocks than you did originally, for example? Or are growth stocks taking up more of your portfolio than they did before?

Then, consider your sector exposure. Although you may not have built your portfolio with a specific sector mix in mind, you want to be sure that you aren't overexposed to one particular industry.

Finally, look at your investments, one by one. Which ones have performed the best? These investments may now be taking up more of your portfolio than you originally intended.

Step 4: Readjust. 

Pare back the parts of your portfolio that have grown and direct those dollars to the investments that haven't.

Next: Our Rebalancing Guidelines >>

 
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