posted on January 23rd 2017 in Austin CFP Team Posts with 0 Comments /

This post is a preview of WorthPointe’s e-book Evidence-Based Investing: Separating Fact From Fiction, written by Certified Financial Planner™ Scott O’Brien. In Evidence-Based Investing, Scott discusses the myths and misinformation that most often slow or halt our financial goals. Get your complimentary copy of Evidence-Based Investing here.

 

Rebalancing helps you maintain your preferred risk level and loss tolerance. Remember when we talked about that in the chapter on allocation? Once you determine your allocation, the next challenge is to stick to that plan.

If you determined that the ideal portfolio target allocation is 55% stocks, 40% bonds and 5% real estate, you don’t want your portfolio to move too far from this. Your target allocation should have been primarily determined by your loss tolerance, so if your portfolio allocation drifts too far off target, you start assuming more risk than you intended or vice versa.

Occasionally, you must get rid of some of the high performers and nourish the low performers for growth to happen while maintaining your loss tolerance.

For example:

If your target allocation is 60% stocks and 40% bonds and the stock market is doing well, then perhaps your portfolio changes with the increased growth in the stocks so stocks now make up 70% of your portfolio and the safer bonds make up only 30%.

There is no doubt that the increased value of your portfolio pleases you. However, you’re now in a position of higher risk if the stock market uptrend should reverse. So, if you want to minimize your risk, you want to lock in some of your gains and reduce your stock investments back to your original target allocation of 60%.

In the opposite scenario…

Let’s say you’re 60% stock and 40% bond allocation has changed due to the stock market suffering a period of negative returns (like happened in 2008).

Now your portfolio is 50% stocks and 50% bonds. Your risk has lowered considerably, but you have more loss tolerance than your current allocation was aiming for. All you have to do is readjust your portfolio back to its original target allocation by selling some of the bonds and buying more stocks — and you buy them while they’re cheaper.

In essence, rebalancing is a methodical way of selling high and buying low — exactly what you want to be doing!

 

Read the rest in Evidence-Based InvestingGet Your Complete Copy of the Book Now.

about the author: Scott W. O'Brien CFP®

scottScott W. O’Brien CFP® is a CERTIFIED FINANCIAL PLANNER professional who serves clients by coordinating their financial lives and assisting them in making smart financial decisions within the areas of investments, retirement planning, insurance strategies, tax minimization, and estate planning.

Scott was honored as the winner of the 2015 Five Star Professional Wealth Manager for Austin, San Antonio and the Central Texas region. He has been quoted in the Wall Street Journal, US News & World Report, MainStreet.com and Investopedia.

Learn more and/or Contact Scott

Continue Reading

Other articles filed under Austin CFP Team Posts

The Morgan Report 2017 Q2 Review: Passing Inspection

July 17, 2017 - I’m always surprised where my inspiration comes from for my quarterly reviews. This quarter it comes from a photo of my 3-year-old son getting his first official military salute from Vice Admiral Mike Shoemaker, who was the Grand Marshall for...
Continue Reading

WorthPointe Featured on Best Austin Financial Planners List

May 15, 2017 - The Austin Business Journal recently featured WorthPointe on their list of top Financial Planning Firms in the Austin area that they released earlier this month. The 2017 list of financial planning firms was open to comprehensive financial planners with offices...
Continue Reading

Essentials of Selling Your Business (and Designing Your Post-Sale Life)

May 8, 2017 - You never have so much success, money, or experience that you can’t go broke. Develop a plan for post-sale success prior to the sale of your business. WorthPointe Partner Morgan H. Smith, Jr., IMBA, CFP® was invited by the Austin...
Continue Reading

Estate Planning

May 1, 2017 - This is an excerpt from Chapter 7 of Certified Financial Planner™ Scott O’Brien’s brand new e-book Surviving to Thriving: A Financial Resource for Divorcées and Widows. This e-book brings you in depth information from 7 experts across industries to help...
Continue Reading

Insurance for Women in Transition

April 24, 2017 - This is an excerpt from Chapter 6 of Certified Financial Planner™ Scott O’Brien’s brand new e-book Surviving to Thriving: A Financial Resource for Divorcées and Widows. This e-book brings you in depth information from 7 experts across industries to help...
Continue Reading

Return to Blog Home