Every year you need to re-balance your investments. Don't forget to adjust your asset allocation as you age (See steps 12a-12c). Use this adjusted allocation as your goal. Your Birthday or the New year are great cues to remind you to re-balance.
Re-balancing means selling issues that you are overweighted in. You then buy into investment classes that you are underweighted in. For a simple example let's say I set my Small Cap allocation to 5% of my portfolio. Last year that grew to 7%. I also set my international stock fund to 5%. Last year it fell to 3%. To keep my investments in line with my asset allocation I should sell 2% of the Small Cap fund and buy 2% of the international fund. This forces you to sell high and buy low.
Keep in mind the 1% rule of expenses. If it would cost more than 1% to re-balance don't bother. This happens in the beginning of your investment life. Values are so small it doesn't make sense to sell. In this case you want to buy into balance. This is done by monthly buying into the class you are lowest in until you hit your allocation in that class. Then move on to the next lowest class.
Here is an example of a 50 year old with a little over 100k invested. With a $4.00 transaction fee you can move up to $400.00 at a time. If you are out of balance by less than that, It is not worth the fee to re-balance that class.
| Age 50 Mortgage 90% payed off | Old total | Sell | Buy | Fee | New total | Goal |
| 7% Large Cap stock fund | 6,500.00 | 500.00 | 4.00 | 7,000.00 | 7,000.00 | |
| 6% Mid Cap stock fund | 7,256.00 | 1,256.00 | 4.00 | 6,000.00 | 6,000.00 | |
| 6% Small Cap stock fund | 8,400.00 | 2,400.00 | 4.00 | 6,000.00 | 6,000.00 | |
| 10% International stock fund | 7,400.00 | 2,600.00 | 4.00 | 10,000.00 | 10,000.00 | |
| 6% Growth stock fund | 6,050.00 | 6,050.00 | 6,000.00 | |||
| 7% Value stock fund | 6,223.00 | 756.00 | 4.00 | 6,979.00 | 7,000.00 | |
| 8% Emerging market stock fund | 8,500.00 | 500.00 | 4.00 | 8,000.00 | 8,000.00 | |
| 5% US bond fund | 4,100.00 | 900.00 | 4.00 | 5,000.00 | 5,000.00 | |
| 10% TIPS bond fund | 11,700.00 | 1,700.00 | 4.00 | 10,000.00 | 10,000.00 | |
| 7.5% International bond fund | 6,400.00 | 1,100.00 | 4.00 | 7,500.00 | 7,500.00 | |
| 7.5% Corporate bond fund | 7,300.00 | 7,300.00 | 7,500.00 | |||
| 5% Cash in a Money market | 5,025.00 | 5,025.00 | 5,000.00 | |||
| 5% CD's | 4,000.00 | 5,000.00 | 5,000.00 | |||
| 10% Real estate value | 10,000.00 | 10,000.00 | 10,000.00 |
I have an asset allocation excel spread sheet starter I can email you if you like. You plug in your numbers and it will do the math for you. Just drop me a line at thefettler@yahoo.com
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