When investment portfolios are designed, financial planners follow factors and strategies that result in a certain weight assigned to the various asset groups. A widely recommended approach involves balancing the weight of the asset classes for the purpose of matching investment horizons, financial goals, and risk tolerance.
Let’s say a Qualcomm employee in San Diego has $10,000 to invest and decides to allocate everything to FAANG stocks, which stands for shares of Facebook, Amazon, Apple, Netflix, and Google. In this case, the portfolio will be 100 percent allocated to equity securities, thus creating a major imbalance and great risk because Wall Street analysts have been warning about overpriced tech stocks for years. Using this example, here’s how to rebalance the assets in a financial portfolio.
Know What a Balanced Portfolio Looks Like
A balanced portfolio will feature a sensible allocation among the major asset classes: fixed-income, equities, and cash. In the aforementioned example of a Qualcomm employee, the $10,000 investment strategy could be improved by distributing the money as follows:
- 50 percent FAANG stocks
- 25 percent United States Treasury Bonds
- 25 percent U.S. dollar cash fund
By lowering direct exposure to Wall Street by 50 percent, this balanced portfolio example would offer some protection during times when investors pull their money out of the stock market and put it into bonds or cash investments. If you’re not sure you understand the details of how to balance your portfolio, call a San Diego investment advisor to find out more about how to go about it.
Learn How to Recognize an Unbalanced Portfolio
Even though the asset allocation percentages don’t change on their own, the weight of the portfolio will certainly change in response to market conditions. In the case of the portfolio above, the 50 percent allocated to FAANG stocks would have made it look very fat in 2017, particularly when the Dow Jones Industrial Average was at record-high levels while the U.S. dollar lagged and U.S. debt securities lost value, which would have resulted in more than 50 percent of the total portfolio value being allocated to stocks.
Rebalance for a Reason That Suits Your Needs
Most financial planners recommend rebalancing at least once a year or whenever the portfolio performance results in a risk exposure higher than what should be tolerated. Balancing doesn’t have to be limited to shifting money around. Some investors may be approaching retirement age and thinking about safer ways to manage their portfolios, or they may want to explore diversity by allocating some assets to emerging market funds.
Take the Smart Beta Approach
One strategy for rebalancing a portfolio is known as smart beta, which involves keeping an eye on the markets and diversifying holdings a few times per year. This isn’t quite active investing, but it goes beyond choosing benchmark index products such as the S&P 500. Smart beta approaches may include looking at inefficiencies in the market and investing in commodities, foreign currency, or futures contracts. Smart beta may increase investment risk, but it can also be isolated to a portion of the portfolio.
Although knowing how to rebalance your portfolio based on market conditions and your individual needs can enhance your ability to manage your portfolio well, it’s also a good idea to seek help from a seasoned professional. To manage your investments wisely, seek advice from an experienced financial planner. Jan Gleisner, with 16 years of experience in investment strategy, can help you customize your portfolio to meet your financial needs throughout your life and into retirement. Call 858-337-2385 to schedule an appointment.