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George Divel Investment tip #9

Reasons to Re-Balance Your Portfolio

Many advisors recommed rebalancing one’s portfolio on a regular basis. But what about the argument that rebalancing really means taking winnings out of your investments that have done the best and putting them into those that have done the worst. Does this really make sense?

Actually it does, for two good reasons.

First, rebalancing really mean “buy low, sell high.” When an asset class rises in value, you trim it back (selling some high) to beef up your holdings in other asset classes. It’s a mechanical discipline, like dollar-cost averaging, that over a lifetime tilts the odds in your favor.

Second, rebalancing works best when referring to asset classes not individual stocks. With stocks, a good rule of thumb – or at least a rule of thumb to consider, especially in a taxable account – is to “cut your losses and let your winners ride.” With asset classes . . . like “U.S. Equities” or “International Equities” or “Cash” or “Long-Term Bonds” or “Real Estate Investment Trusts” or “Commodity Funds” . . . it’s unlikely that the relative advantage of one asset class will just keep gapping ever wider for decades relative to the others.

So just as dollar cost avering (investing a fixed amount on a fixed schedule, regardless of the market price) is a good overall investment strategy…. so is periodically balancing your portfolio to adhere to your overall financial plan for asset class diversification.

Of course, your investment goals change with your personal situation and time line. Make sure that your portfolio is keeping pace with your goals by consulting with your financial advisor regularly.

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April 23, 2008 - Posted by | Uncategorized

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