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Investing Specialists

The Error-Proof Portfolio: 5 Tips for a Busy Rebalancing Season

With equity allocations drifting higher, here's some practical advice for restoring balance.

In many years, rebalancing your portfolio--shifting out of asset classes and securities that have done well and into those that have underperformed--isn't a must-do. Portfolios' overall asset allocations just don't move around that much on a year-to-year basis. According to the redoubtable Bogleheads website, you'd need a 4% move in stocks to shift the balance of a 50/50 stock/bond portfolio up or down by 1 percentage point. Meanwhile, portfolios that skew more heavily toward stocks or bonds would experience even smaller asset-allocation adjustments.

Yet, the past five years have featured extremely robust returns for stocks, with equities posting double-digit gains in every year but 2011. Bonds, meanwhile, have experienced far smaller gains. A hands-off investor with a 50% stock/50% bond portfolio in late 2008 would now be the proud owner of a 60.4% equity/39.6% bond portfolio. Given that you achieve your best risk/reward profile by rebalancing when your portfolio veers 5 or 10 percentage points from your targets, rebalancing belongs on many investors' to-do lists right now. 

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