Asset allocation and Investment Strategies

The importance of asset allocation strategies is a no brainer for most investors. However, many shrug off, or ignore, the importance of also revisiting their portfolios and rebalancing them to make sure they are on target to meet their goals.

Employing Rebalancing Strategies

You may want to build your retirement nest egg, or you may see it as a way to save for your children’s education. No matter the reason you start investing, the goal is typically the same. You want to put your money into vehicles that will result in maximal returns.

Most of us set about the investing task by heavily researching companies if we are looking at stocks, or researching the credit worthiness of issuers if we are looking at bonds. When we’re done, we build a portfolio that is complete with a variety of investments. After all, we’ve been schooled that asset allocation is key to taking advantage of investment opportunities.

The problem some may later encounter relates to revisiting their portfolio holdings to make sure they are on track to meeting their financial goals. Called rebalancing, this strategy can be just as important as selecting what to put in the portfolio in the first place.
Here, we’ll examine this strategy.

Let’s begin with reviewing exactly what this strategy entail.

The balancing act

It all starts with asset allocation. You want to make sure you choose the near perfect percentage blend of stocks, funds and bonds to hit your investment goals. You also want to make sure your choices can withstand the ebbs and flows of the markets. You don’t want to end up in a situation where your equity portion outperforms your debt holdings, or vice versa, and you miss out because you didn’t adjust your weight percentages.

Choosing the right investment vehicles to achieve an optimal asset allocation mix is just the tip of the iceberg when it comes to making sure your returns meet your financial goals. You must also take care in making sure that mix is maintained, which is where rebalancing comes into play.

Rebalancing entails bringing your portfolio back to its original asset allocation mix. Over time, the mix can get out of whack due to a myriad issues. These issues can be of the macroeconomic nature, such as a rise in interest rates. Or they can be due to microeconomic factors, such as a company guiding lower on their earnings because they are selling off a unit of its business.

SEC’s take on rebalancing

The U.S. Securities and Exchange Commission promotes rebalancing. It gives thorough tips on the subject, in fact. It notes three ways to rebalance your portfolio:
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Sell off investments from over-weighted asset categories and use the proceeds to purchase investments for under-weighted asset categories

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Purchase new investments for under-weighted asset categories

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Alter your contributions so that more investments go to under-weighted asset categories until your portfolio is back into balance


The SEC also reminds us to not forget to review the investments within each asset allocation category.

[fusion_testimonials design=”classic” backgroundcolor=”” textcolor=”” random=”” hide_on_mobile=”small-visibility,medium-visibility,large-visibility” class=”” id=””][fusion_testimonial name=”SEC” avatar=”none” image=”” image_border_radius=”” company=”” link=”” target=”_self”]
“If any of these investments are out of alignment with your investment goals, you’ll need to make changes to bring them back to their original allocation within the asset category.”[/fusion_testimonial][/fusion_testimonials]

Rebalance, but don’t overdo it

Rebalancing observers recommend knocking the dust off your portfolio at least every six months. Then there is the train of thought that you should only rebalance your portfolio when there is a change in the weight of an asset class.

The most important thing to remember is that you should not develop the habit of constantly reconsidering and moving the assets in your portfolio around. It’s easy to get swept up in headline news that are driving the markets lower, or higher. However, you should not use these happenings as a reason to rebalance your portfolio. Stay focused and remember you’re saving for the long-term, not short-term.

An interesting point made about when to rebalance relates to basing your decision on an asset’s past performance. Many are guided by the notion that if an investment performed well over the past year, for example, it will likely perform well over the next year, points out Investopedia.

Avoid cheating yourself using such logic. Don’t weight your portfolio based on past performance. So, as Investopedia notes, remember that equities are more volatile than fixed-income securities. Therefore, last year’s large gains may very well translate into losses over the next year.

The beauty of rebalancing mutual funds

One of the best investments to benefit from rebalancing relates to mutual funds. It’s said that rebalancing an investment portfolio packed with mutual funds is an ideal way to take advantage of the ‘buy low and sell high’ strategy.

When you rebalance your mutual fund portfolio, you are returning one’s current investment allocations back to the original investment allocations, explains The Balance.

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“Therefore rebalancing will require buying and/or selling shares of some or all of your mutual funds to bring the allocation percentages back into balance. In different words, rebalancing is an important maintenance aspect of building a portfolio of mutual funds, just as an oil change or tune-up is to the ongoing maintenance of your car.”[/fusion_testimonial][/fusion_testimonials]

Also, with mutual funds, there may be tax issues that result from rebalancing. It is recommended that you allocate new investments to underperforming funds to minimize tax implications that could come from rebalancing. If those funds pay dividends, choose to receive them in cash instead of having them automatically reinvested. This can allow you to reinvest at your pleasing.

In conclusion

Those who practice rebalancing have the opportunity to do away with holdings, or pick up new positions, to make sure their portfolio’s mix stays in line with their investment goals. There are cases when investors find that some of their holdings are growing at a faster rate than others, but they hadn’t weighted their positions in it enough to take advantage of that growth. Rebalancing allows them to do so quickly, and hopefully adequately, so that they are capitalizing on the strongest portfolio performers.

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