Smart Allocations and Rebalancing 101

An Investor’s smart allocations and rebalancing of their portfolio not only determines a large portion of the risk that a portfolio will have, but it also can greatly influence any potential market edge an investor may have.  How often and when the portfolio is rebalanced plays another role with performance.  Both over time if handled well can significantly provide a return edge to an investor’s portfolio.

When I was a financial consultant at one of the big investment houses years back we were taught the 110 allocation rule.  Basically it states that an investor should deduct their age from 110 to get their allocation of stocks to bonds.  So if you were 40 years old and subtracted 40 from 110 you get 70, or a 70% percent allocation of stocks and a 30% allocation of bonds.   

Smart Allocations and Rebalancing Issues

The problem with this numbers based allocation rule is that the economy and market doesn’t care how old you are, so trying to allocate your funds based on your age doesn’t make a lot of sense.  Imagine having a large bond allocation from 2010 to 2020.  The amount of returns an investor would have passed up is tremendous.  The better way to handle this situation is to figure out how much money you will need over a certain number of years and put that money away for safekeeping while having the rest of your investment working alongside what the economic or business environment is doing.  

allocations rebalancing

If the economic picture is telling you to put your money allocations into stocks then allocate your funds with these types of products.  If the economic picture is telling you to invest in risk free assets then do so.  Consumer spending drives our economy, so if consumers are spending heavily then businesses will grow and most likely outpace inflation.  If the growth gets out of hand and the economic picture is saying to slow down then money flow will reflect the change.  These changes usually take time to play out, so even an annual reallocating of your percentages or rebalancing of your assets to reflect the economic picture should work.

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