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By Jason Stipp and Christine Benz | 03-27-2014 05:00 PM

Benz: Hold Your Nose and Rebalance

If you haven't checked your portfolio for a while, chances are your allocations are out of whack--which may call for rebalancing into an unpopular asset class.

Jason Stipp: I'm Jason Stipp for Morningstar.

As the first quarter is winding down, we're checking in with Christine Benz, our director of personal finance, for some tips on making sure your portfolio is on track--and doing some spring cleaning along the way.

Christine, thanks for joining me.

Christine Benz: Jason, great to be here.

Stipp: As always with your portfolio checkups, you say start at the general level, the asset allocation level. If I haven't checked my asset allocation for a while, what might I see when I crack open that portfolio?

Benz: You are likely to see higher exposure to equities than perhaps would be your target allocation. When we have strong equity markets, a little bit of inertia tends to set in, and you tend not to want to mess with a good thing if you see your returns going up and up. But chances are, most people's portfolios are pretty equity-heavy relative to their targets if they haven't done anything for the past few years.

Over the past year, even if you had a mediocre domestic-equity fund, it probably returned about 20%. Bonds, you were lucky to earn 2% or 3%. So chances are, things are a little bit out of whack. It calls for stripping back some of the equities and adding to fixed income.

Stipp: So sell some equities if they have gone over my target range and … buy bonds?

Benz: I know. Rebalancing is so counterintuitive, and really everyone hates fixed income right now. But you need to step back and think about why you're owning fixed income in your portfolio. It's not your return engine. Current yields have historically been a pretty good predictor of bond fund returns. At 2%-3% right now, you're not likely to earn great returns going forward.

But what you will have is the potential for much smaller losses or maybe even gains when the equity market goes down. You'll have that ballast. From that standpoint, I think bonds still makes sense, particularly for people who are getting close to retirement or certainly in retirement.

Stipp: Bonds are there to help with diversification. They are to provide ballast. Not necessarily there to be the biggest returning thing in your portfolio?

Benz: That's right. I think you also want to pick your spots within fixed income. Probably most people don't need long-term bonds in their portfolios. Stick with a good-quality, core intermediate-term fund, maybe a flexible fund. PIMCO Total Return has been in the headlines a lot lately, but I still like it. I know [Morningstar fund analyst] Eric Jacobson still likes it. It is a core holding. Harbor Bond, is the no-load analog. Or perhaps look to something like Dodge & Cox Income, where they've got a good value-leaning strategy. Just make sure that your fund is pretty opportunistic and free-ranging. I think that's what you want in a fixed-income market like the current one.

Stipp: That could take a little bit of the edge off if we do see rates tick up.

The next thing is, look at some of the sub-allocations--where your different types of equities are.

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