{"id":12066,"date":"2017-10-13T14:05:09","date_gmt":"2017-10-13T21:05:09","guid":{"rendered":"http:\/\/www.marketriders.com\/investing\/?p=12066"},"modified":"2017-10-13T14:05:09","modified_gmt":"2017-10-13T21:05:09","slug":"stock-market-created-risk-problem-portfolio","status":"publish","type":"post","link":"https:\/\/www.marketriders.com\/investing\/stock-market-created-risk-problem-portfolio\/","title":{"rendered":"Has The Stock Market Created A Risk Problem In Your Portfolio?"},"content":{"rendered":"

You hear a lot of rules of thumb on asset allocation. “Own your age in bonds” and similar ideas, usually meant to lower your risk from a sharp move downward in stocks.<\/p>\n

Rule of thumb thinking isn’t wrong, per se. If you are 20 years old, the most you would want to own in bonds<\/a> is 20% of your investments. Certainly if you are lucky enough to reach 100 an all-bond portfolio might be appropriate.<\/p>\n

There are plenty of arguments against it, too. A young person with decades of investing ahead probably should own no bonds at all.<\/p>\n

And a 70-year-old might be more comfortable with owning just 50% in bonds or 90%, depending on what other income he or she might have in retirement, such as Social Security or a pension.<\/p>\n

\"risk\"<\/p>\n

Similarly, you have to ask who the money is for, really. A retiree in good health nearing 90 might be mostly concerned about growing the balance for his or her heirs, kids who might be no older than 10. If health is an issue, though, safe income is paramount.<\/p>\n

But let’s assume that you are happy with your current asset allocation<\/a>, which might be 70\/30, that is, 70% stocks and 30% bonds. What happens when the stock market runs higher and higher, which it has done for the past few years?<\/p>\n

If you do nothing, pretty soon your stock investments become 80% of your holdings, just because they have increased in value. If you reinvest your dividends (and you really should<\/a>), maybe higher still.<\/p>\n

Your risk profile now looks different and you’ve done nothing at all. Should you?<\/p>\n

There’s no easy answer. It could be that the stock market loses value in the coming six months or year, pushing you back to 70\/30. Or it might flatline for a while, or just keep climbing.<\/p>\n

Rather than worry about that, consider a periodic portfolio rebalancing. This could be quarterly, annually or several times a year based on cost.<\/p>\n

If you do it just once or twice a year, what happens is that you do the one thing that investors need to do to get ahead \u2014 sell high and buy low.<\/p>\n

A simple act<\/h2>\n

In the case of rebalancing<\/a>, what you are selling high is whatever part of your portfolio has departed from the target percentage you originally set. So you sell the 10% gain in stocks and use it to buy bonds. You’re back to 70\/30.<\/p>\n

Bond might not be lower, per se. But they are lower than the target you had set. If stocks are up to 80% of portfolio, bonds are now at 20%, even if they haven’t changed in value or perhaps have increased in value.<\/p>\n

Yes, taking profits can mean paying investment taxes. But that’s why it’s important to be sure that the rebalancing is worthwhile, cost-wise. Often it is, but not every time stocks creep a bit higher. If you are investing in a tax-sheltered retirement plan, all the better.<\/p>\n

Over time, that simple act of selling high to buy low adds up, creating return just from checking in on your portfolio once or twice a year.<\/p>\n

MarketRiders, Inc. is a registered investment adviser.\u00a0 Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.\u00a0 Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and\/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.<\/i><\/small><\/p>\n","protected":false},"excerpt":{"rendered":"

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