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The Trick to Balancing, and Rebalancing, Your Portfolio


In volatile markets, your investment portfolio can be thrown out of whack. But financial experts say the key to successfully rebalancing a portfolio is to make sure it was balanced properly in the first place.

Have you ever tried standing on one leg? (Of course you have.) Maybe you were able to maintain that position for one minute, perhaps longer, but eventually -- and before you toppled over -- you put your other foot on the ground. In other words, you rebalanced yourself.

Now imagine that your investment portfolio, the bulk of your life savings and plans for your children’s education and your own retirement, is balancing just as precariously as if you it were standing on one leg. You certainly wouldn’t leave it like that -- you’d rebalance as quickly and effectively as you could. But the key to getting that rebalancing act right is knowing how and when to do so.

A Basic Balancing ActRichard Leader is the chief investment officer for First Houston Capital. He says that before rebalancing your portfolio, it’s essential to understand that it must be balanced in the first place. And a balanced portfolio, says Leader, starts with a long-term focus.

Things go in and out of fashion, Leader says. “There was the popularity of technology stocks about ten years ago. Currently the popular investment vehicle seems to be gold,” he notes. “Inevitably, history tells us that different assets have phases of popularity, then return to lesser popularity.” Leader explains that balancing a portfolio should be dictated by an individual’s personal circumstances, not the popular assets at the time.

Regardless of circumstances, he stresses combining assets that are the cheapest at the moment. In other words, investments which currently are out of favor with investors. “That’s the hardest thing for people to do; to force themselves not to go chasing the things that are popular,” he says.

Leader is an advocate of sticking to the basics, which means having a portfolio comprised of approximately 60 percent stocks and 40 percent in bonds. Older investors might want to error more on the conservative side with a greater percentage in bonds, while younger investors might have a greater percentage in stocks.

“And the reason why you want to stick with stocks, bonds and cash is that they’re liquid,” he explains. “You can’t rebalance a portfolio of six apartment buildings, and you can’t rebalance a portfolio of three bags of gold coins. You need to focus on long-term liquid assets.”

Looking Beyond the BasicsTyler Vernon of Princeton, N.J.-based Biltimore Capital Advisors says his firm doesn’t recommend holding stock for the long-term through good times and bad. “We’ve had two 50 percent drops over the last ten years, and people who have held onto stocks in the hope that the wind blows in the right direction haven’t really done that well,” he says.

Vernon says it’s important for investors to have antennas in the air for signs of stress in the market. One of the signs he employs is the Chicago Board Options Exchange Volatility Index, or VIX, which measures volatility in the marketplace. Historically, when times are good, the VIX is in the high teens, he says, but in May it spiked to between 30 and 40. That means there’s a lot of volatility and fear out there, he says.

“We believe it’s time to get cautious and maybe get out of some stocks altogether and go to cash,” Vernon says, “If you can protect portfolios during bad times, the good times will take care of themselves.”

As such, Vernon does not believe in the long-term, sit-and-wait approach. Instead, he advocates a more active philosophy than sitting down once a year to re-examine an investment portfolio. He also recommends steering clear of advisors who want to slot investors into one of their three or four investment models. “There isn’t one size that fits all. It’s important for everyone to have a customized, individual portfolio that’s catered just to them.”

Life Events Change EverythingOne thing both Leader and Vernon agree on is that when life events enter the picture -- such as a divorce, a death, or the birth of a child -- it’s crucial to re-examine, and likely rebalance, your portfolio.

“An inheritance could change your whole asset picture,” Leader says. “All of a sudden, your portfolio is unbalanced.”

With that in mind, Vernon advocates working with not just asset managers, but planners—professionals who will meet with you for hours to understand not only a physician’s needs, but to uncover risks that even you might not understand.

“Don’t simply talk to one side of the family,” he stresses. “Get the other spouse involved. It’s important to involve them and educate them about different strategies and goals.” It will make your significant other feel better when they can get their arms around a situation, and have some control over it, Vernon adds.

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