• June 2010

Finance expert John Hasenberg asks, "Why Rebalance Your Portfolio?"

By John Hasenberg
Senior Vice President, Financial Advisor
Morgan Stanley Smith Barney

Simply stated, staying the course doesn’t mean driving with blinders. Investors should monitor their portfolios regularly to determine if they support and respond to their financial goals.

For years, investors have heard the mantra of investing for the long term. That is, to create a portfolio based on your goals and stick with it despite the rumblings of a fickle market or the allure of popular trends.

In theory, this is a suitable strategy for many investors, but staying the course wisely should also acknowledge the need for the occasional mandatory detour, taking on additional passengers, having fender benders and making complete about-faces. The better prepared a portfolio is to respond to these unforeseeable life events, the more likely it will be able to help you reach your desired financial destination.

Annual Rebalancing

Annual rebalancing is key to the long-term health of your portfolio. Rebalancing involves shifting assets from one type of investment to another to bring a portfolio in line with an asset mix created for specific goals. If this action is done on a regular or automatic basis, you can help ensure that your portfolio stays on track.

Many mutual fund companies offer the option of automatic rebalancing within various investment programs. This service can help investors avoid micromanaging their portfolios and it furthers the lines of communication between an investor and his or her financial advisor. In addition, this enforces use of the commonly embraced discipline of selling high and buying low.

Seven Rules of Effective Portfolio Maintenance

1. Construct an initial portfolio with a goal-sensitive allocation of stocks, bonds and cash. Keep informed about the subsets and varieties of these categories.

2. Be aware of your short- and long-term goals when designing your portfolio.

3. Generally, make more comprehensive rebalancing an annual event. Many experts agree that investors who rebalance at this interval or slightly longer reap many of the same benefits as those who do so more often.

4. Remember that rebalancing comes from paring down or eliminating specific investments in a portfolio. In many cases there may be tax consequences, like realized capital gains. Try not to burden yourself with tax liabilities you may not be prepared to handle. Yet at the same time, you must weigh the benefits of overall return over some tax savings.

5. Don’t rely on natural progressions in the market to rebalance a portfolio. Keep in mind that this practice is not applicable to total equity portfolios, because stocks typically appreciate over time.

6. Consider contributing to your portfolios via a systematic or dollar-cost averaging strategy. Systematic investing, the process of making consistent contributions on a regular basis, can help bring you closer to your financial goals.

7. Stand by your plan. Your portfolio was created to respond to a number of scenarios and goals. Don’t allow yourself to be easily swayed by the latest trends, but do contact your financial advisor if you feel the need to make a change.


About John Hasenberg

John Hasenberg is a Senior Vice President and Financial Advisor at Morgan Stanley Smith Barney in Washington, DC. Contact him at (202) 861-5101 or www.fa.smithbarney.com/hasenberg.

Morgan Stanley Smith Barney LLC and its affiliates do not provide tax or legal advice. To the extent that this material or any attachment concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Any such taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor.

© 2010 Morgan Stanley Smith Barney LLC. Member SIPC.