Re-balancing

Re-balancing

Re-balancing is an important part of the investment and financial planning process for a number of reasons.  First, broker neglect is less common since it ensures holdings reviewed periodically.  Second, it initiates a conversation with the investor that may trigger other considerations.  Third, it instills discipline; the advisor is forced to sell high and buy low, at least on a comparative basis.  Fourth, at times there will be losses when a position is sold; such losses can be used to offset gains plus up to $3,000 of ordinary income each year.  Fifth, and perhaps most important, it repositions the portfolio so its risk level is the same as the client's. 

A number of studies have shown what happens to an equity/fixed-income portfolio left unchecked.  The results of these studies are obvious.  Over time, the equity portion represents a bigger and bigger percentage of the portfolio. 

Balancing Guidelines: 

  1. Avoid re-balancing too often unless the markets dictate otherwise:  Studies have shown there is a slight advantage in performance by re=balancing once every 12-18 months. 
  2. Focus on the stock/bond mix:  Changes in value, growth, small, mid or large cap equity categories are fine, but the biggest impact on risk and return will be the simple equity/fixed income mix.
  3. More leeway with secondary categories:  By employing additional categories (sectors) one can avoid a re-balance as a specific category or sector, due to a negative correlated portfolio, may offset the stock/fixed income mix
  4. Use tax advantaged accounts:  Utilizing retirement accounts (IRA's) or tax deferred annuities provide hedges against a possible tax loss within the portfolio since buying and selling within an IRA creates no taxable event

Source:  Institute of Business and Finance:  Graduate Series Module V.


 

Website Design For Financial Services Professionals | Copyright 2017 AdvisorWebsites.com. All rights reserved