“Knowledge is knowing that a tomato is a fruit, wisdom is not putting it in a fruit salad.” Miles Kington, British Journalist, 1941-2008
Question: After last year’s market activity, should I review and rebalance my investments?
Answer: Yes, to maximize your efforts, it’s beneficial to monitor your portfolio on a regular basis. Whether you need to rebalance will depend on your goals and results.
In many ways, investment oversight is like tending a garden. We have a small garden in our back yard that Pete tends to, and from what I see, it takes a whole lot of work. Gardening, like investment management, requires continuous oversight and action. For instance, when the tomatoes completely overtook the garden, Pete needed to pull some plants out to make room for the peppers and lettuce. Responding to changes can be as important as initially sowing the seeds.
Portfolio examination and maintenance are important matters. Just as circumstances change in your life, they also change in financial markets. That’s why it’s wise to regularly review and compare the distribution of stocks, bonds and cash to your original objectives, making sure the current mix is still appropriate.
Because of stock market activity, investors may find themselves with a larger percentage of their portfolio in stocks than originally intended. It may feel counterintuitive to sell all or a portion of something that has been working well, yet that may be exactly what’s necessary. Using those proceeds to purchase investments in other sectors that currently account for less of your portfolio may ultimately help you to enjoy the fruits of your labor for years to come.
If your fundamental portfolio allocation was built on sound reasoning and a logical process, it only makes sense to monitor and stick to that strategy. Although it may be tempting to skip this review process, especially when things are going well, it is an important component of financial planning.
If stocks have risen, a portfolio originally designed to hold 50 percent stocks and 50 percent bonds could have morphed into 70 percent stocks and only 30 percent in bonds. After straying from the original allocation, rebalancing allows you to bring investments back to the initial 50/50 mix. Rebalancing in this case would involve either adding cash for new investments or selling some of the stock and reinvesting the proceeds in other asset classes to bring the percentage of stock in the portfolio back to 50 percent. The discipline and structure of regular reviews to maintain relative allocation percentages reminds us to take profits and keeps portfolios aligned with their original intentions.
Some people prefer to set a certain time each year to review their investments. Tax-time, year-end or your birthday are easy dates to remember. To adhere to this strategy, you’ll need to be comfortable with the fact that investing is cyclicaland that all investments generally go up and down in value over time.
Part of tending your investment garden may involve putting money into investments that behave very differently from 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.
Rebalancing may have adverse consequences if done too often, especially in taxable accounts. If capital gain taxes are due on appreciated stocks, it’s important to know how long the stocks have been owned. If it’s less than one year, you may want to consider whether the benefits of selling will outweigh the higher tax rate you may pay on short-term capital gains. This does not affect tax-deferred accounts such as 401(k)s or IRA’s.
In taxable accounts, you can avoid or minimize taxes another way. Instead of selling your portfolio winners, simply invest additional money in assets classes that have been outpaced by others. Doing so can return your portfolio to its original mix. And be sure not to overlook transaction costs; make sure any changes are cost-effective. No matter what your strategy, work with your team of trusted financial professionals to keep your portfolio on track.
If you’ve ever had a garden, you know that each plant has its own cycle and season. If the tomatoes and peppers have taken over it may be time to harvest the crop and make salsa thereby creating space for the green beans. Even a neglected garden, or portfolio, may produce results. Increase the odds of obtaining your desired results by tending the garden. Adaptation to external environmental conditions is important to gardeners and investors alike. Stay focused and invest accordingly.
Asset allocation and diversification do not guarantee a profit nor protect against a loss. This information is general in nature; it is not a complete statement of all information necessary for making an investment decision. Investing involves risk and the possible loss of principal invested. Past performance is not indicative of future results. There is no guarantee any particular investment strategy will be successful.
Opinions expressed herein are those of the author and subject to change at any time. Please note, changes in tax laws or regulations may occur at any time and could substantially impact your situation. We do not render advice on tax or legal matters. You should discuss any tax or legal matters with the appropriate professional.
This article provided by Darcie Guerin, CFP®, Associate Vice President, Investments & Branch Manager of Raymond James & Associates, Inc. Member New York Stock Exchange/SIPC 606 Bald Eagle Dr. Suite 401, Marco Island, FL 34145. She may be reached at 239-389-1041,firstname.lastname@example.org or www.raymondjames.com/Darcie. Please contact Darcie with any questions you would like to have answered in this column.