It’s the start of the year, when many workers get annual reviews from their bosses.
It’s too late to do anything about that now, because you’re the recipient in that exercise. But you can do something about your investments. After all, they’re supposed to be working for you.
If you want to take charge, it’s time to re-examine your portfolio and, if it’s gotten out of whack, rebalance it. Got too much stock? Sell some and put the money into bonds or money market funds.
“Otherwise you’re letting the market dictate what risk you’re taking,” said Bryan Olson, Charles Schwab’s vice president for investment research.
As an example, Olson set up a hypothetical portfolio that held 60 percent stocks and 40 percent bonds on the first day of 1994. By the end of 1999, the galloping stock market had raised the value of the stocks to 80 percent of the portfolio. “That was just in time for a three-year bear market,” he pointed out.
He ran the same test through the down years of 2000, 2001 and 2002.
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“At the end, you had only 40 percent in stocks, just in time for the 2003 market rally,” Olson said. “In both cases, you participated more than you thought in the downside.”
Managing risk is the main reason for a periodic rebalancing. Another reason is that the process compels you to stay with your plan.
“It forces self-discipline,” Olson said. “You’re going to sell what’s gone up and buy what’s gone lower, and that’s what you should be doing. People often make the mistake of buying what’s gone up.”
Three things you can do
– Review your plan. Let’s say you’re young and you have 80 percent of your investments in stocks. Are you still happy with that relatively high exposure? Will you need money in the next year or two to make a down payment on a house? If so, you should think about pulling that slug of money out of the stock market.
– X-ray your portfolio. Write down how much of your portfolio is in each asset class. To check out the holdings of a mutual fund, go to www.morningstar.com, type the fund’s ticker symbol in the search box and hit Enter.
Decide if the change is worth it. Remember that you’ll pay commissions for buying and selling, and you may increase your tax bill if you’re selling your winners.
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Edited by Lara Weber ([email protected]) and Drew Sottardi ([email protected])