If you are working and adding to your retirement funds, redirecting contributions to areas that are under your desired allocation is a good strategy. If you are retired, then rebalancing is the most effective method to maintain your desired allocations between asset classes (bonds/stocks/large companies vs. small, etc.)
When to rebalance? Studies have shown and, specifically research by Gobind Daryanana as reported in financial-planning.com magazine (December 2008 issue: "Balancing Acts"), shows that 20% relative bands are optimal. What?
Simple. Really. If you specify, for example, that you want 10% of your portfolio to be in small-company value stocks, then a 20% relative band means that if your small-company value funds are less than 8% (20% less of the 10% desired) then you would buy more and add to that category. If that style of fund is 12% (20% more than the 10% desired) or more of your total portfolio then you would sell some to bring it back in line.
If you are still working, then you would just redirect future contributions to the laggard funds.
How often does this happen? Some advisors will lead you to believe that you have to watch it daily or monthly at least but that does not seem to follow the actual data. You may find that every 3 years that your allocations may get that far out of line to require adjustments. You still should monitor more closely especially when market volatility is high (like these days).
An Introduction
Hi. Welcome to BourGroup and my blog. Phil
Phil Bour is a CERTIFIED FINANCIAL PLANNER(tm) professional since 2004, a Magna Cum Laude college graduate and an accounting professional for over 35+ years. I love numbers, statistics and economic history.
I am also an Enrolled Agent (EA) to represent taxpayers before the Internal Revenue Service and to prepare tax returns.
"Phil"osophy: I believe that you can manage your money on your own (not necessarily through individual stock selection but through mutual funds, ETF's and other solutions) once you receive some one-time, professional guidance. Why pay annual fees when there may be little added value? For additional information, first read the "An Introduction" label at the left. Then move on to others.
Phil Bour is a CERTIFIED FINANCIAL PLANNER(tm) professional since 2004, a Magna Cum Laude college graduate and an accounting professional for over 35+ years. I love numbers, statistics and economic history.
I am also an Enrolled Agent (EA) to represent taxpayers before the Internal Revenue Service and to prepare tax returns.
"Phil"osophy: I believe that you can manage your money on your own (not necessarily through individual stock selection but through mutual funds, ETF's and other solutions) once you receive some one-time, professional guidance. Why pay annual fees when there may be little added value? For additional information, first read the "An Introduction" label at the left. Then move on to others.