Tags: Benz | stocks | bonds | rebalance

Morningstar's Benz: Time to Re-Examine Your Portfolio

By    |   Thursday, 25 September 2014 01:21 PM

Although financial advisers generally recommend rebalancing portfolios at year-end, Morningstar Director of Personal Finance Christine Benz advises rebalancing now to make sure your allocations match your targets and you're not over-invested in risky sectors.

According to Benz, now — at the end of the third quarter — is a good time to check your allocation of stocks, bonds and cash to see how they meet your targets.

Given the run-up in stock prices in recent years, you might have more in stocks than you'd prefer, she notes, adding that you should rebalance if your bond allocation is undershooting your target by 5 or 10 percentage points.

This may be a good time to lock in your gains. "Think of it as the equivalent of walking away from the casino with full pockets," Benz writes.

Make sure your portfolio does not contain too much in any sector, Benz adds. Although you don't have to copy the broader market, comparing your holdings with a total market benchmark will show where you stand. When examining different sectors, look at their valuations. For instance, tech stocks look expensive, while basic materials and energy stocks appear the most attractively valued.

Follow these steps to complete your rebalancing act, Benz advises.
  • See how your holdings are split between U.S. and foreign companies. Since U.S. stocks have outperformed foreign stocks in recent years, you may have less international stocks than you planned.
  • Re-evaluate your fixed-income portfolio to make sure you're not skewed toward low-quality bonds or long-duration bonds vulnerable to interest rate risk. You can run your bonds portfolio through a duration stress test if you're worried about inflation, but low-quality bonds that could suffer in an equity-market sell-off are just as great a risk to bond investors.
  • Finally, check if you have enough liquid reserves — an emergency fund of three to six months of living expenses if you're still working. Retirees, who should place even greater importance on liquid reserves, might consider holding six months to two years of living expenses.
Wall Street Journal columnist Jonathan Clements also touts the benefits of rebalancing, saying it will help control risk following increases in stock prices. For instance, if you split your portfolio 50-50 between stocks and bonds at the end of 2012 you might now have a 59 percent in stocks and 41 percent in bonds, which could leave you vulnerable to greater losses.

"I'd make a point of rebalancing once a year. But if we get a big market move, you might rebalance right away," he advises.

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Although financial advisers generally recommend rebalancing portfolios at year-end, Morningstar Director of Personal Finance Christine Benz advises rebalancing now to make sure your allocations match your targets and you're not over-invested in risky sectors.
Benz, stocks, bonds, rebalance
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2014-21-25
Thursday, 25 September 2014 01:21 PM
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