Is a First Half Portfolio Rebalance Worth it?


Things probably haven’t gone as you’d hoped. At the start of the year, investors had plenty of reason to think the stupendous stock-market recovery of 2009 would continue.

It did for a while but, to cut to the chase, the first half of 2010 has been a disappointment, thanks to the faltering economic recovery, worries about the European debt crisis and a raft of other problems.

For many investors, stock-market losses and bond market gains seem to demand a round of portfolio rebalancing, to get the allocation to each type of asset back on target. Then again, in a volatile period, you wonder whether a move from bonds to stocks might have to be quickly undone if conditions change.

Let’s start with a look at the numbers. According to Lipper, the fund-data company, the average diversified U.S. stock mutual fund was down 5.68% from Dec. 31 through July 1. Meanwhile, the average taxable long-term U.S. bond fund was up 4.61%. That sounds like enough to require readjustment.

But would that really throw your portfolio out of kilter?

Assume you rebalanced at the start of the year to make a portfolio 60% stocks, 30% bonds and 10% cash. The entire portfolio would be down about 2%. Your stocks would make up about 57.8% of the portfolio, bonds about 32% and cash, assuming it had held even, about 10.2 percent.

Although your stocks have fallen nearly 5.7%, they still make up nearly 58% of the portfolio, not far off the 60% target. Bonds, too, are only about 2 percentage points off target.

Why bother rebalancing? A quick uptick in stocks could quickly put them even closer to the target.

Of course, your portfolio might look quite different. Lots of individual stock funds have suffered much more than the average. So the first-half statements coming this month deserve some real scrutiny.

As a general guideline, it’s probably not worth rebalancing until one or more asset classes are off target by at least 10 percentage points, especially if selling one asset to buy another would involve broker’s commissions or trigger tax bills on profits.

If you do feel rebalancing is called for, use a few strategies to minimize costs.

By confining the rebalancing to no-load mutual funds, you can avoid commissions. Confine it further to tax-favored accounts like 401(k)s and IRAs and you won’t suffer a tax consequence.

So long as your accounts hit the allocation targets as a whole there’s no need to hit the mark within every type of account – taxable and tax-favored.

If you must rebalance in a taxable account, minimize any taxable gain, or maximize any tax loss, by selling shares that were most expensive. For example, if you accumulated shares in a bond fund at various prices over the years, sell the ones for which you paid the highest price.

Your brokerage or fund company can tell you how to specify which shares to sell.

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