Fall 2008 issue of Horizons

FOR YOUR MONEY

The Importance of Portfolio Rebalancing The recent volatility in the equity markets presents a good opportunity to review your portfolio as it pertains to your original goals and objectives. It is likely that your portfolio is now over or under-weighted in the various asset classes originally selected, which could change your risk/return profile. When establishing your initial asset allocation strategy, you most likely went through a detailed discovery process with your advisor to identify your goals, objectives and investment time horizon; assess your risk tolerance; and evaluate your financial condition and tax situation. Your resulting initial asset allocation contained various percentages of stocks, bonds, cash and alternative investments. At that time, this portfolio represented the optimal combination of the various asset classes that you and your advisor believed would generate sufficient returns to meet your objectives at an acceptable level of risk. However, individual asset classes come in and out of favor at different times in the business cycle and, accordingly, the percentages of these various asset classes in your portfolio will change over time. Therefore, to stay on track, you should periodically review and rebalance your portfolio. Rebalancing your portfolio is an integral part of risk control. While rebalancing may sound logical, it can feel uncomfortable in practice. It requires selling high- performing assets and purchasing currently unfavorable assets – in other words, using the profits from your winning assets to buy others that are likely to rebound as the business cycle evolves. In rising stock markets, investors may become overconfident and take on more risk than they originally intended. A belief popular among many investors is By Mike Ferman, CPA

7 ◆ fall 2008 issue