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It’s Time To Rebalance Your Portfolio 2011

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It’s hard to believe, but 2011 is almost over. One of the most important things an investor needs to do is to examine their portfolio and rebalance it at least once a year or so. If you haven’t rebalanced your portfolio in 2011, then it’s time to look it over and see how your investments are doing.

2011 is turning out to be a tough year for the stock market. In this market, it is essential to rebalance your portfolio so you can take advantage of the downturn in various segments.

One good thing about having a blog is I can go back and check what I wrote about rebalancing in 2010.

This is what my allocation looked like after I rebalanced the portfolio in 2010.

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

And this is how the market performed this year.

2011 stock market rebalance

VFLTX , VFIIX = bond; VTSMX = total market; VWO = emerging market; VB = small cap ETF

As you can see, the foreign market is not doing too well this year. Small cap also went down over 5% this year.

In 2010, small cap stocks went up over 20% and threw our portfolio out of balance. Our portfolio was over-weighted with small cap funds. It was a good thing I rebalanced it when I did and took some profit.

This is what my allocation looks like now.

large cap 31% international 15% cash 12%
mid cap 6% emerging 14% bond 10%
small cap 11%

This is somewhat close to my target allocation.

large cap 30% international 17.5% cash 10%
mid cap 5% emerging 17.5% bond 10%
small cap 10%

The international and emerging market holdings went down quite a lot this year due to the Europe debt crisis as well as the slowdown of growth in China. Now would be a good time to pick up some of those funds for a discount. It is scary though because we don’t know how much further those markets will drop.

It is tempting at this time to change my target allocation. I really want to change my international and emerging target allocation to 15% each. Should I do that or stick to my guns?

The target allocation shouldn’t change yearly though so I think I will need to shift some funds into those down market right now. Next year I will re-evaluate the target allocation and see if it really needs to change. We need to shore up our cash if I execute my exit strategy and quit my job.

Conclusion – It’s best to stick with my target allocation when I’m rebalancing. The target allocation should change only once every few years. What do you think? Is this a good policy? Did you rebalance your portfolio? 2011 is almost over so if you haven’t done it yet, you need to sit down and take a look at your investments.

 

 

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{ 38 comments… add one }
  • 101 Centavos November 28, 2011, 4:07 am

    Not a bad idea to keep your finger on the pulse of the markets. In various guises, I’m more skewed towards cash than any other, but that’s only by personal preference.

    • retirebyforty November 28, 2011, 10:42 am

      I will be more skew toward cash and bond very soon. We need to evaluate our target allocation next year and plan for living on one income and contributing less to saving.

  • Jack Daniels November 28, 2011, 4:33 am

    A good article about re-balancing one’s investment portfolio.

    • retirebyforty November 28, 2011, 10:42 am

      Thanks!

  • Hunter - Financially Consumed November 28, 2011, 7:31 am

    This time of the year is a perfect for rebalancing, as you can take advantage of tax considerations if available in a little over a month. I think your allocations are very close to your targets so I wouldn’t bother changing right now, unless you can identify tax benefits. My allocations are a little more aggressive and I am more hands-off than you; my investments are almost entirely in a target date Roth where they do the rebalancing for me. I suppose that lazy for a financial planner to be so hands-off, but I am comfortable with the risk, their management, and reasonable fees; T.Rowe Price.

    • retirebyforty November 28, 2011, 11:00 am

      I would like to shift some money into foreign market to bring those up a bit. Some of our investment are also in target date funds.

  • NoTrustFund November 28, 2011, 8:45 am

    It’s great that you have a consistent rebalancing schedule for your portfolio, I need to be better about that. I like to rebalance my portfolio using cash that I am committing to long-term savings- that way I don’t have to do a lot of buying and selling. Sometimes it takes a few months to have enough cash to rebalance but that’s ok in the long run.

    • retirebyforty November 28, 2011, 11:01 am

      That’s what I do throughout the year. With the foreign market dropping so much this year, it is difficult to bring the portfolio back in line with new investment. I will probably have to liquidate move some money around, but I will try to do it in the 401k account to minimize tax implication.

  • PKamp3 November 28, 2011, 8:46 am

    Before or after the market closes? It looks like today will be doing good things to the stock portion of your portfolio, haha.

    • retirebyforty November 28, 2011, 11:02 am

      Today looks great! I hope it runs up a bit more so I can sell some losers to get tax deduction. 🙂

  • Roshawn @ Watson Inc November 28, 2011, 9:23 am

    I do hope today’s rally keeps going for a while.

    Anyway, I do think it is a wonderful time to rebalance. With the volatility the markets have been going through, it’s very easy to not even want to deal with it right now. However, as you said the target allocations don’t change as frequently, so by realigning your portfolio, you will make sure that you stay on track.

    • retirebyforty November 28, 2011, 11:02 am

      I agree! Thanks for your comment.

  • Jeff @ Sustainable life blog November 28, 2011, 9:26 am

    Sounds like a good plan joe – I dont need to re balance because i’ve got a target date fund and they automatically do it for me. I do need to check up on my contributions though.

    • retirebyforty November 28, 2011, 11:03 am

      That’s great, it’s a lot easier with a target date fund. Max out your contribution if you can. 🙂

  • Aloysa November 28, 2011, 12:11 pm

    Since I am not retiring by 40, I am re-balancing anything. But I am waching closely. So far it is pretty disturbing but I am waiting for better days. If those days don’t come in January, I might re-think my 401K investment options.

    • retirebyforty November 28, 2011, 10:37 pm

      Rebalancing is a long term strategy and you should consider using it. You can direct new investment toward certain sectors to steer your portfolio toward your target allocation. I think it is an essential tool for long term investor. You should figure out your allocation strategy. 🙂

  • krantcents November 28, 2011, 5:25 pm

    I usually look at my asset allocation in December. I think it is a good time to re-balance. I want to see if the market volatility calms down before I make changes.

    • retirebyforty November 28, 2011, 10:38 pm

      It seems like volatility is the norm these days. The stock market swing so crazily in both direction, it’s dizzying.

  • Marie at FamilyMoneyValues November 28, 2011, 6:01 pm

    Thanks for the reminder. I do check our allocations and do some re-balancing each year.

    With mutual funds, it is very difficult to get an exact allocation picture as the managers are always pulling into and out of cash positions – so I generally just use the intent (i.e this fund invests in small cap international stock and etc.

    This year is a bit more mixed up for me since I am in process with moving company retirement funds to individual retirement accounts and am having to cash out and re-invest some of it.

    • retirebyforty November 28, 2011, 10:39 pm

      I use the intent as well. 🙂
      Good luck with the job change.

  • My University Money November 28, 2011, 7:23 pm

    It’s always good to re-balance, but just out of curiosity how did you determine those initial settings as being ideal for your portfolio?

    • retirebyforty November 28, 2011, 10:42 pm

      There are various sites that can help you figure out your risk tolerance and ideal allocation. I think vanguard has a good tool. I read up on various strategy and formed my target allocation over the years. My withdrawal timeline is long so I have most of the portfolio in stocks. I also think it’s good to diversify out of the US, that’s why my foreign and emerging market % is a bit higher than usual.

  • Jeffrey Trull November 28, 2011, 8:09 pm

    Confession: I’ve never rebalanced. I guess this is further evidence that I should either do more about it myself or seek professional help. Not sure if I missed it, but is there a reason to rebalance in December? Or is that just the time of year you’ve chosen?

    • retirebyforty November 28, 2011, 10:45 pm

      You can use target date fund if you want an off hand approach. Mrs. RB40’s portfolio is all in target date fund.
      Reasons for rebalancing in December? I think most investors put off rebalancing until the last minute. 🙂 We can also take this time to sell some losers and take the tax deduction. It’s part of year end clean up that I do.

  • Barb Friedberg November 28, 2011, 8:15 pm

    I check the allocation about 3 times per year and don’t rebalance unless the percentages are way off. You are quite savy to maintain a large percent of your assets in equities for the greatest opportunity for growth.

  • I rebalance every quarter. And have it done automatically. So I’m all set.

    • retirebyforty November 29, 2011, 12:49 pm

      That’s great, auto pilot is the way to go.

  • Little House November 29, 2011, 6:46 am

    I’ve kind of pulled out of the market for now (paying down my car loan) and only am investing in mutual funds. I think sticking with your original target is probably a good idea. Who knows what the market will do next in the short term; as long as you’re in it for the long run, you should be fine.

    • retirebyforty November 29, 2011, 12:51 pm

      I’m sticking with the stock market for now. I’m investing for the long term and the dip just means an opportunity to dollar cost average in at a cheaper price. 🙂
      The volatility is tough to swallow though.

  • Miss T @ Prairie Eco-Thrifter November 29, 2011, 9:38 am

    I tend to make changes at the beginning of the next year. Makes filing taxes a lot easier I find. Plus I like to be able to run yearly reports and keep things streamlined.

    • retirebyforty November 29, 2011, 12:52 pm

      Really? I like to do it in December so I can file all the tax next April. If I rebalance in January, I have to keep the record for April 2013.

  • Jackie November 29, 2011, 11:16 am

    Rebalancing is something that I’ve neglected lately. Thanks for the reminder!

    • retirebyforty November 29, 2011, 12:52 pm

      Nobody wants to rebalance when the market is down, but it is the best time to do it.

  • Andy Hough November 29, 2011, 2:15 pm

    I don’t have a strict allocation that I follow. Since I’m still adding to my portfolio I can just invest more in areas where I’m underweighted.

  • First Gen American December 1, 2011, 12:23 am

    That chart makes me want to cringe. I guess that’s why I’ve been hoarding cash this year instead of diving in even deeper.

    • retirebyforty December 1, 2011, 8:50 am

      Isn’t the dip suppose to be the best time to buy? That’s why we need to rebalance. I’ve been hoarding cash more than usual too, but that’s because we are building up a reserve for when I leave my full time job.

  • Financial Samurai December 4, 2011, 8:18 am

    May I ask how your portfolio has done year to date? I just went 50% equities 50% cash from 97% cash on Black Friday and will ride it out.

    • retirebyforty December 4, 2011, 9:41 pm

      My 401k is still down about 9%, but my net worth overall is up about 10%. That’s with contribution and some profit taking earlier in 2011.
      I cashed out to save for the 4 plex down payment and I was lucky to not have that portion took the ride down with the market in the last few months.

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