Monitor your portfolio and mix it up

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By Doug Awad

You probably already know you need to monitor your investment portfolio and update it periodically. Even if you’ve chosen an asset allocation, market forces may quickly begin to tweak it.

For example, if stock prices go up, you may eventually find your self with a greater percentage of stocks in your portfolio than you want. If stock prices go down, you might worry that you won’t be able to reach your financial goals.

The same is true for bonds and other investments. Do you have a strategy for dealing with those changes? Your game plan for fine-tuning your portfolio periodically should reflect your investing personality.

The simple choice is to set it and forget it – to make no changes and let whatever happens happen. If you’ve allocated wisely and chosen good investments, you could simply sit back and do nothing.

Even if you are happy with your overall returns, remember that your circumstances may have changed. Those changes may affect how well your investments match your goals. At a minimum, you should periodically review the reasons for your initial choices to make sure they are still valid.

Even things out: To bring your asset allocation back to the original percentages you set for each type investment, you’ll need to so something that may feel counterintuitive: sell some of what’s working well and use that money to buy investments in other sectors that now represent less of your portfolio.

Typically, you’d buy enough to bring your percentages back into alignment. This keeps what’s called a “constant weighting” of the relative types of investments.

For example, if stocks have risen, a portfolio that included only 50 percent in stocks might now have 70 percent in equities. Rebalancing would involve selling some of the stock and using the proceeds to buy enough of the other asset classes to bring the percentage of stock in your portfolio back to 50.

This doesn’t represent actual returns; it merely demonstrates how rebalancing works. Maintaining those relative percentages not only reminds you to take some profits when a given asset class is doing well, but it also keeps your portfolio in line with your original risk tolerance.

A common rule of thumb is to rebalance your portfolio whenever one type of investment gets more than a certain percentage out of line. Or you can set a regular date like the end of the year.

To stick to this strategy, you’ll need to feel comfortable with the fact that investing is cyclical and all investments go up and down from time to time.

Forecast the future: You could adjust your mix of investments to focus on what you think will do well in the future, or cut back on what isn’t working. Unless you have an infallible crystal ball, it’s a trickier strategy than constant weighting.

Even if you know when to cut back on or get out of one type of investment, are you sure you’ll know when to get back in?

Mix it up: You could also attempt some combination of strategies. For example, you could maintain your current asset allocation strategy with part of your portfolio.

With another portion, you could try to take advantage of short term opportunities, or test specific areas that you and your financial professional think might benefit from a more active investing approach. By monitoring your portfolio, you can always return to your original allocation. There are other strategies you can pursue to mix it up.

Discussing your particular circumstances and goals with your financial advisor would be a good place to start.

Points to consider: 1. Keep and eye on how different types of assets react to market conditions. Diversifying means putting part of your money into investments that behave differently than the ones you have now.

Asset allocation and diversification don’t guarantee a profit or insure against a possible loss, of course. But you owe it to yourself to see whether there are specialized investments that might help balance the ones you have.

2. Be disciplined about sticking to whatever strategy you choose for monitoring your portfolio. If your game plan is to rebalance when your investments have been so successful that they alter your asset allocation, make sure you aren’t tempted to simply coast and skip your review.

Make sure you check with your financial professional if you are thinking about deviating from your strategy.

3. Check to see that the nature of what you are invested in hasn’t changed. For example, if your mutual fund is investing more in international than your thought, it could upset your asset allocation.

4. Some investments don’t neatly fit into a stock-bond-cash allocation. You will probably need help figuring out how hedge funds. Real estate, private equity, and commodities might balance the risk and reward of your portfolio.

Balance the costs against the benefits are rebalancing: Don’t forget that too frequent rebalancing can have adverse tax consequences for taxable accounts. You might want to check to see if you have held a stock long enough to qualify for capital gains tax.

If not, weigh the advantages of paying the high taxes against the gains you will be making. This, of course, is not an issue with 401(k), or IRA accounts. You might also want to think about transaction costs. Make sure the changes are cost effective.

If you have questions, call Doug Awad at 854-6866, or e-mail Doug.Awad@raymondjeames.com. He is a resident on the 200 Corridor and his office is on 31st Road, adjacent to Paddock Mall.

This information was partially developed by Forefield, Inc., an independent third party. It is general in nature, is not a complete statement of all information necessary for making an investment decision, and is not a recommendation or a solicitation to buy or sell any security. Investments and strategies mentioned may not be suitable for all investors.

Past performance may not n indicative of future results. Raymond James & assoc., Inc. does not provide advice on tax, legal or mortgage issues. These matters should be discussed with an appropriate professional.