| NEW YORK
NEW YORK Aug 13 Investors who wish they were
better at buying low and selling high actually have a tool that
can force them to do just that. It's called "rebalancing" - the
practice of regularly re-allocating a portfolio so the
investments in it stay in their originally intended proportions.
A 60 percent stocks-40 percent bonds portfolio will get out
of kilter if you leave it alone long enough. To rebalance, you
have to cut back on the portion that grew - typically the stocks
- and add money to the other side.
An investor who does that regularly will protect herself
from taking more risk than she intends. She also will often lock
in gains and buy securities at better prices than she might
Last year - a boom year for stocks and a bad one for bonds -
provides a classic example of why investors need to rebalance.
If you started 2013 with a $100,000 portfolio invested in
two funds - one 60 percent invested in Standard & Poor's 500
stock index and 40 percent in Barclay's Global Aggregate Bond
Index, via exchange traded funds, you would have ended the year
with a much more aggressive stance: 68 percent stocks and 32
Rebalancing is easy for workers who invest through their
company 401(k) plan. A one-fund program, such as a target date
retirement fund, will be regularly and automatically rebalanced
by its managers. Large company retirement plans often let
workers leave standing automatic rebalancing orders, so their
portfolios can be adjusted quarterly or annually.
That works especially well for retirement investors because
there are no tax consequences to their rebalancing efforts.
But individual investors who have non-retirement portfolios
of their own have to work harder to make rebalancing work.
That's because their trades often involve some transaction costs
and some tax consequences. And because they may have to
rebalance manually, instead of on autopilot.
Here's how to do it best.
DON'T JUST STICK WITH THE CALENDAR
This year tells a different story. With the S&P 500 up 4.43
percent and the bond index up 5.51 percent, asset allocations
haven't changed much. Instead of regularly rebalancing even
small amounts, let the growth of your investments be your guide,
suggests Ben Welch, director of advisor business development at
TD Ameritrade Institutional.
Welch's firm has software that allow its advisers to monitor
portfolios by their asset allocation, but individual investors
can watch the same numbers.
Set a band of 5 percent or 10 percent, and when one part of
your portfolio outgrows its intended allocation by that much,
start to think about rebalancing. For example, think 'rebalance'
once a 60 percent stock portfolio turns into a 66 percent stock
portfolio. Will you miss the top of the market with part of your
investments? Yes, but you'll take solid earnings off the table.
If you have to rebalance via a brokerage account that has
high transaction fees, rebalance less often. That was the
conclusion of a paper published recently in the Journal of
Bank of America's Merrill Lynch researcher Himanshu Almadi
and others said investors facing low costs would do better
rebalancing quarterly, those facing higher costs should
rebalance once a year.
PLAN FOR TAX CONSEQUENCES
It's better to hold taxable securities for at least a full
year so they can qualify for lower long-term capital gains tax
You can cut your taxes further by selling your losing
investments while you're selling your winners, to lock in those
losses. You can rebuy the same losing investment in 31 days, or
simply buy a similar but different one immediately to complete
Brian Burmeister, a Denver financial adviser with Charles
Schwab's private client group, tells his clients to sell losers
before they hit the long-term one-year mark.
That way, at tax time they can offset short-term gains and
ordinary income, both of which are taxed at higher rates than
THINK OUTSIDE BROAD CATEGORIES
Don't just think of stocks and bonds. Rebalance a global
portfolio when one region runs away from the others. Rebalance a
mixed stock portfolio when growth stocks get away from
Do this steadily enough and you might turn into one of those
rare finds: an individual investor who buys low and sells high.
(Editing by Bernadette Baum)