The “mix” of your investments determines over 90 percent of the performance of your portfolio. Rightly so, this activity occupies a great amount of the investor’s time and effort to assure that it matches financial goals, risk profile and time frames. Once the allocation is determined, it is important to keep your investment mix on target to obtain the benefits. One reason is to avoid emotions from taking over your well prepared plan. How can you best accomplish this without unnecessary expense and effort?
Constantly adjusting your investments to match your plan would be costly as commissions and advice fees add up rapidly. A better approach is to determine an optimum schedule or basis for making adjustments. There are two schools of thought, one recommends rebalancing your portfolio to the plan on a schedule and the other based on how far your current portfolio has drifted from the plan. Several studies in the Journal of Financial Planning offer guidance. One suggests, for a typical balanced portfolio, rebalancing should be performed every three to four years and only when the allocation has shifted by greater than 5 percent. This study was done prior to 2007. Another advises that rebalancing based on allocation shifts is more beneficial than using a monthly or quarterly schedule. With more rapid market changes, such as we have seen in the last few years, it seems to be beneficial to check your mix once a year and rebalance if you are off target by 5 percent or more.
Adjusting your port- folio less than once a year may seem like forever to those who are trading several times per month. However, over a span of several years, the returns generated by a portfolio that is rebalanced based on these criteria have been greater. In part, this is because you are sticking to your plan and not chasing hot investments.
A side benefit is your trading and tax costs will be less.
Reviewing your allocation balance once a year gives you an opportunity to review your goals and assure that the allocation targets you have chosen still match your financial goals.
Combine these activities, improve your results, and lower your costs.
Tom Roberts, principal with A New Approach Financial Planning in Lakewood Ranch, can be reached at (941) 927-9590 or Tom@ANewApproachFP.com.