MONEY Rebalancing Act
Protect your money from your greatest enemy — your emotions — by periodically revisiting your portfolio. ::
BY GREG BROWN Y
ou probably remember the TV ads with Ron Popeil, the master pitchman and president of Ronco. With
dozens of roasting chickens slowly twirling around him in tabletop rotisserie ovens, he implored viewers to “Set it and forget it!” But if you bought one of those ovens and bothered to
read the manual, you would have learned the reality of the situation. In the oven’s instructions, in big letters, was this warning: “Please don’t take ‘Set It and Forget It’ literally.” Investors should follow the same advice on their
retirement savings. For decades, advisers have begged people not to forget about their holdings and to rebalance. This means selling stocks, bonds, or funds that have risen in value and to reinvest the resulting cash into positions that have lost value. Rebalancing automates the process of selling high
and buying low, leading to emotion-free investing and a higher total return. “Rebalancing still makes a lot of sense, regardless of the type of market we’re in. It provides discipline to the undisciplined, which is most of us,” says Bill Hammer, a certified financial planner in Melville, N.Y., and author of The 7 Secrets of Extraordinary Investors. It helps to be thoughtful about the process, Hammer
says. For instance, you might sell a portion of a holding after it has risen 8 to 12 percent. Or, to make it easier Hammer says, just do it periodically: quarterly or annually, regardless of the percentage drifts. Over time,
72 NEWSMAX MAXLIFE | AUGUST 2012
too, reconsider your allocations as priorities change. Finally, consider setting your
funds to distribute dividends as cash instead of automatically reinvesting,
Hammer tells Newsmax. “This allows you to
rebalance your portfolio with more buying than selling — much better for taxes,” he says. Some investment funds took matters into their own
hands, creating their own “Set it and forget it” products: the target-date funds. These funds have prospered and now amount to some $330 billion, up from $70 billion a half-decade ago, reports The Wall Street Journal. Many target-date funds have their problems, such
as high fees. The typical small investor, though, should take rebalancing seriously, even if that means doing it manually. “The concept of rebalancing in my experience has proven to be very, very valuable,” says Chris Kimball, a certified financial planner in Lakewood, Wash. “It takes the emotions out of buying and selling investments. Time after time, studies have shown, people do the wrong thing at the wrong time because they are driven by emotion.” Boston research firm Dalbar studies how investors
react to market trends. We are consistently bad at “guessing right” the direction of the markets, they report, always buying at market highs and selling it all at lows. As a result, the typical stock investor using mutual
funds underperformed the S&P 500 by 4.32 percent on an annualized basis over 20 years. Bond investors fell behind by 5.56 percent annually.
PHOTO COMPOSITE: ISTOCKPHOTO
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