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2010 Asset Allocation – It’s time to rebalance

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asset allocation reshuffle 2010

flickr - robert hextall

2010 is a great year for the stock market and our portfolio has recovered nicely from the Great Recession dip. Some sectors did better than others though and this has thrown my portfolio out of whack. It’s time to reshuffle and bring it back to the targeted allocation.

I used the combination of these two ways to rebalance the portfolio.

  1. Send new contribution toward the under-weighted segment throughout the year.
  2. Sell some assets and reallocate once or twice a year

My 2010 Target Asset Allocation

large cap 30% international 20% cash 5%
mid cap 10% emerging 20% bond 5%
small cap 10%

My allocation at the beginning of December

large cap 26% international 16% cash 8%
mid cap 9% emerging 16% bond 7%
small cap 18%

Small cap has gone up over 20% this year and it has grown bigger than the targeted allocation. Luckily, some of these small cap funds are in my 401k and I can move them to large cap funds with no trading cost.

All new contributions are going toward international and emerging markets so they should go up to 20% some time in Q1 or Q2 2011.

There are a bit more cash and bonds than I’d like, but most of that is in the company-matched 401k account and I can’t touch the investment in that account. My 401k is split into two accounts – employee contribution and employer matching. Cash also includes the 3-6 months emergency fund so I’m not worry too much about the allocation being a bit high.

This is what the allocation currently looks like after a little rebalancing.

large cap 30% international 16% cash 8%
mid cap 9% emerging 16% bond 7%
small cap 14%

The small cap is still overweight and I will need to sell 4% and split the proceeds to international and emerging. I’ll do that in my Roth IRA so I don’t incur any tax penalty.

2010 was a great year for small cap (18% gain) and mid cap (16% gain) US stocks.

Emerging market was a little disappointing, but it still had 12% gain. Large cap came in at 9%, not bad. International stocks did quite poorly due to the European debt crisis only gained 8%.

Which segments will be good in 2011? Hopefully Europe will work out their problems and my international holdings will see some nice gains next year, but anything can happen. The one thing I know is this – small cap won’t be leading the pack at the end of 2011. That’s why we need to rebalance every year. We’ll revisit this in 2011 and see if I was correct.

Have you rebalanced your portfolio? Many investors do not take the time to reallocate and their portfolio does not reflect their risk tolerance anymore. If you haven’t gone over your asset allocation in 2010, now is the time to do it.

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{ 19 comments… add one }

  • Andrew @ 101 Centavos December 10, 2010, 3:48 am

    Joe, good reminder to at least look at your portfolio and be more active in the 401K plan. Many people I speak to on this subject don’t even bother to look at it once it is set.

  • Moneycone December 10, 2010, 4:50 am

    Ah! A fellow boglehead fan! Thanks for the reminder!

  • BeatingTheIndex December 10, 2010, 6:54 am

    It’s a great time to review your asset allocation and plan for next year’s RRSP/TFSA contributions (if you’re Canadian). I will be doing the same in my retirement funds (they are index funds unlike my DIY portfolio)

  • Everyday Tips December 10, 2010, 7:38 am

    I need to take a day and rip through all of my finances. I feel like they have gotten away from me somewhat as life as gotten so busy.

    Sounds like I have a New Year’s Resolution on the horizon. Thanks for the motivation.

  • Sandy @ yesiamcheap December 10, 2010, 8:09 am

    I was JUST looking at them last night. I realized that I am way too heavily invested in bonds and would like to keep up my large cap allocation. I also have too much in retirement date indexed funds that are performing poorly in relation to the rest of the market. Always nice to revisit and shuffle. Still my portfolio is up 12% so it’s not all bad, but it could have been better.

  • retirebyforty December 10, 2010, 10:02 am

    I found it very difficult to rebalance if I don’t keep an eye on the allocation through out the year. Over the last 3-4 years, I keep an excel sheet and update the price every few days. This enabled me to constantly see my allocation and adjust new contribution as needed. Previously, it’s always such a huge chore to pull all the accounts together to see the allocation.
    Everybody, have fun rebalancing. It is always a lot more fun when the portfolio is up, isn’t it? πŸ˜€

  • Roshawn @ Watson Inc December 11, 2010, 2:23 am

    I haven’t rebalanced again, but my portfolio does reflect my current risk tolerance!

    • retirebyforty December 11, 2010, 7:49 am

      I have a lot of problem rebalancing. When something is doing well, I want to let it ride. That’s part of the reason why my small cap got so out of target. If it’s off by a bit, no big deal, but if it is way out of whack then it’s time to move some stuff around.

  • Barb Friedberg December 11, 2010, 4:37 pm

    Hi-I was struck by how aggressive your portfolio is (90%) equities. For someone in their 30’s (I’m guessing here), with a high risk tolerance, you are certainly poised for an option to really garner some outsized gains. I agree, that to maintain the allocation, it does take a bit of time. Although I use quicken for our family portfolio, I have a detailed excel spreadsheet for the asset allocation. It takes awhile to update, but it’s fun to see the results! About two times per year is usually my asset allocation updating frequency!

    • retirebyforty December 11, 2010, 6:46 pm

      I will need to reduce the risk in 2-3 years or so. I still feel emerging market is worth the risk in the next few years. I’ll probably change emerging markets to 10% in the future and increase bond to 15-20%. I agree with one or two times a year or else it’s just too much thrashing.

  • Aloysa December 11, 2010, 6:37 pm

    You know, I am going to use this artcile as a guideline for our investment review. Great post!

    • retirebyforty December 11, 2010, 6:48 pm

      Thanks! You should at least work on making a target asset allocation even if you don’t have a lot of investments right now. πŸ˜‰

  • youngandthrifty December 11, 2010, 8:53 pm

    Great post! I’m terrible at remembering to rebalance. Great reminder to look at our TFSA and RRSP portfolios (for us Canucks) for our 2011 contributions. πŸ™‚

    • retirebyforty December 12, 2010, 5:10 pm

      I had a difficult time when I started investing because it was so hard to keep track of the current allocation. And it’s very difficult to sell your winners. πŸ™‚

  • Doctor Stock December 12, 2010, 8:48 pm

    Thanks for the post. I’m wondering if you track seasonality in a religious way or not at all really… does it impact where you shift your investments?

    • retirebyforty December 12, 2010, 10:41 pm

      No, I do not track seasonality. Most of my current investments are buy and hold. A small percentage of my portfolio is in short term stocks, but I don’t understand seasonality enough to take it into account. I think the real finance guys like Mark at Buy Like Buffet understand more.

  • Buck December 13, 2010, 6:35 pm

    Great reminder. During reallocation do you consider your tax consequences or did you have all winners? πŸ™‚ Let’s hope for an even better 2011!

    • retirebyforty December 13, 2010, 10:11 pm

      Yes, I have to sell a few losers before the end of the year. Most of my holding are in mutual funds so the few loser doesn’t change the allocation all that much. Thanks for commenting!

  • Money Reasons December 14, 2010, 7:26 am

    Thanks for the reminder! I haven’t rebalanced yet, and the with the market gains this year, it seems to be a wise time to do so πŸ™‚

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