We all know that in order to be a successful investor, you need to buy low and sell high. Sounds simple, right?! Just because it sounds simple, doesn’t mean it’s easy. There are many theories and techniques that can be used to attempt this feat. One technique is to periodically rebalance your investments. Here is an example of how this technique may be used:

 

Lets say you sat down with your financial advisor to discuss your retirement goals. After careful analysis, together you come to the conclusion that in order to accomplish your financial goals, you need to invest half of your money into international companies and the other half into US companies. You and your advisor agree to systematically rebalance your account every 12 months. A year later, when it is time for the first rebalance, US companies shot the lights out and doubled in value, while international companies did nothing and stayed the same value. Obviously, the allocation has strayed and is no longer 50% US and 50% international. Now it’s 66% US and 34% international (with rounding). To rebalance, your advisor sells 16% of your portfolio that is invested in US company positions and uses the proceeds to buy more international which will return your investments back to the original 50/50 allocation. 

 

Not only did you return back to the agreed upon allocation to accomplish your financial goals, but you are also locking in the gains from investments that have done well and using the proceeds to invest into potentially undervalued international investments. Additionally, you are managing your risk by not allowing US companies to dominate your portfolio.

 

While this simple example illustrates how rebalancing can be helpful for somebody who is not yet retired, it can be just as effective for current retirees as well.

 

I believe this works best if you are using diversified investment vehicles such as mutual and exchange traded funds that include many companies from all sectors and industries. Some 401(k) plans have a feature that will automatically rebalance your account just like in the above example. You can call your plan administrator to see if you have access to this feature. Self directed accounts such as IRA or non-retirement after-tax accounts must be rebalanced manually.  

 

Periodic rebalancing is a feature that I provide to all my clients as part of my normal services; there is no additional management charge for this service, however nominal trading costs may be charged to trades by our custodian. I view systematic rebalancing as a critical component of managing risk and an efficient method for keeping an investment strategy consistent with an individual’s financial goals. The original allocation must be based upon your long-term financial goals, risk tolerance and timeframe for investing. Please feel free to contact me if you have any questions about how this technique may be used to achieve your financial goals.