Investing: Time to rebalance

While springtime is when many of us clean up our house, January is the perfect time to spruce up our portfolios. Besides pruning the losers and trimming back winners, be sure that you're diversified among stocks, bonds, and cash, in an allocation suitable to your age and needs. T. Rowe Price recently compared several $10,000 portfolios from the end of 1997 through the bull market that ended in 2000, and then through the following bear market and subsequent recovery. Those investors who were completely in cash ended up with about $14,000, after dropping to just above $12,000 at the bear market low. Those who invested entirely in stocks had over $18,300 at the end of the bull market, but had dropped to below $9,000 at the bear market low.

On the other hand, the diversified investors with a 40/40/20 stock/bond/cash split had nearly $17,000 at the end of the market rise, and almost $12,000 at the market low. This allocation underperformed the all-stock portfolio by about $1,500, but with less volatility and smaller losses.