While you probably already know you need to monitor your investment portfolio and update it periodically, the easy choice is to set it and forget it—to make no changes and let whatever happens happen. But even if you're happy with your overall returns and tell yourself that "if it's not broken, don't fix it," remember that your circumstances will change over time. Those changes may affect how well your investments match your goals, especially if your goals have changed.
Even if your targeted asset allocation (percentage of your portfolio allocated to various types of investments, and a key component to maximizing risk-adjusted returns) hasn’t changed, market shifts may have changed the allocations.
To bring your asset allocation back to the original percentages (or a new desired allocation) you may need to do 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—or to achieve your new target allocation. This does make sense because it follows the time-honored adage of buy low and sell high.
When should you do this? One common approach is to rebalance your portfolio whenever one type of investment gets more than a certain percentage out of line—say 5% to 10%. You could also set a regular date. For example, many people prefer tax time or the end of the year. To stick to this strategy, you'll need to be comfortable with the fact that investing is cyclical, and all investments generally go up and down in value from time to time.
Balance Costs against Benefits of Rebalancing
Don't forget that too-frequent rebalancing in taxable accounts can have adverse tax consequences. Since you'll be paying capital gains taxes if you sell an investment that has appreciated, you'll want to check whether you've held it for at least one year. If not, you may want to consider whether the benefits of selling immediately will outweigh the higher tax rate you'll pay on short-term gains. This doesn't affect accounts such as 401(k)s or Individual Retirement Accounts (IRAs), of course.
Predicting the Future of Asset Classes or Sectors
You could adjust your mix of investments to focus on what you think will do well in the future, or to cut back on what isn't working. Unless you have an infallible crystal ball or a dedicated investment team, 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 go back in?
Combinations of Different Investing Strategies
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.
Other Points to Consider
Keep an eye on how different types of assets react to market conditions. Part of fine-tuning your investment portfolio might involve putting part of your money into investments that behave very differently from the ones you have now. Diversification can have two benefits. Owning investments that go up when others go down might help to either lower the overall risk of your portfolio or improve your chances of achieving your target rate of return.
Be disciplined about sticking to whatever strategy you choose for monitoring your portfolio. If your game plan is to rebalance whenever 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 altogether. At a minimum, you should double-check with your financial professional if you're thinking about deviating from your strategy for maintaining your portfolio.
Some investments don't fit neatly into a stocks-bonds-cash asset allocation. You'll probably need help to figure out how hedge funds, real estate, private equity and commodities might balance the risk and returns of the rest of your portfolio. No matter what your strategy, work with your financial professional to keep your portfolio on track.
The professionals at Busey Wealth Management promise to help you build the financial future you envision—working with you to make important decisions based on your unique situation and goals. To learn more about the comprehensive services offered by Busey Wealth Management, visit busey.com/wealth-management.
This is not intended to provide legal, tax or accounting advice. Any statement contained in this communication concerning U.S. tax matters is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties imposed on the relevant taxpayer. Clients should obtain their own independent tax advice based on their particular circumstances.
This material is provided for educational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities.
This presentation is for general information purposes only. It does not take into account the particular investment objectives, restrictions, tax and financial situation or other needs of any specific client.
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