Rebalancing Your Portfolio Made Easy
In January most people take stock of their personal and professional lives and strive to do better. Resolutions often are followed in the first few days and weeks of a new year with the best of intentions only to fall back into our normal way of life. Many people do not consider their financial goals passed save more and spend less but the New Year is a great time to resolve to rebalance your financial portfolio.
Just like walking into the gym for the first time can be daunting, so can looking at your financial portfolio and determining what the best course of action is to achieve financial freedom and protect your way of life. Different asset classes perform differently and as a result the weighting of each asset class changes. The percent change allocated to different asset classes will change, which could increase or decrease the overall risk of your financial portfolio. With this in mind, we have developed an easy to follow step-by-step guide to help take the worry out of rebalancing your portfolio.
List of Investments
The first step in rebalancing your portfolio is to understand your asset allocation by making a list of all of your investments. As an example, someone has invested $25,000 in precious metals, $75,000 in a 401(k) from his employer. His retirement account at work allocates $45,000 in U.S. stock market, $10,000 in international stocks and $20,000 in a U.S. bond fund.
Determine Your Asset Allocation
In our example we have made the math easy. Your asset allocation is likely not as easy to figure out. The important thing to remember is to group asset classes together. Stocks, bonds, and precious metals are all separate categories. To determine the percentage of asset allocation simply divide the amount of each asset by the total value of the portfolio. In this particular example our investor has allocated ($25,000/$100,000) 25% to precious metals, ($55,000/$100,000) 55% in stocks, and $20,000/$100,000) 20% in bonds.
Decide Your Appropriate Asset Allocation
There are many factors that determine your desired asset allocation. Your age can determine how much risk and volatility you are willing to accept in your portfolio. Younger investors weight their portfolios heavier in stocks because they offer a higher return in exchange for an increase in volatility. If you are unwilling to hold assets that fluctuate and are likely to sell when investments go down, it is best to not weight your portfolio too heavily in stocks. Complete our short questionnaire to determine what type of investment strategy is most appropriate for you.
There is an old adage in the investment world that you should subtract your age from 100 and that is the percentage your portfolio should have in stocks. The rest would be in different types of investments like precious metals and bonds. To continue our example, our investor is 60 years old meaning that his correct allocation to stocks is (100-60) is 40%. The current portfolio is overinvested in stock by 15% and underinvested in precious metals and bonds by 15%.
Investors can rebalance immediately or gradually over time. To immediately rebalance our example portfolio, we would sell 15% of stocks and reinvest the money in gold or other precious metals, or even buy more bonds. This would bring our portfolio in balance to help reach our financial goals. The less direct and immediate way to rebalance our portfolio is to reapportion future investments into the underserved asset classes. Essentially we stop investing in stocks and increase our investment in precious metals or bonds.
Investors need to rebalance their portfolios to help maintain their original asset-allocation strategy and adjust for any changes in life or investment strategy. Rebalancing helps investors counteract what goes on in the market and protect their long-term financial well-being.
Rebalancing on annual basis has proven to lead to a small increase in the long-term value of the portfolio. This is a result of selling the over-valued assets and investing in the undervalued assets. For more information about retirement and financial planning, contact a Precious Metals Specialist at (800) 775-3504.