We don’t have too many reasons to complain about the markets this year, as we’ve seen record-breaking highs across the board. Whether you are invested in growth, value, large-, mid-, or small-cap stocks, the indexes are in the black—and most of them with double-digit gains.
And sector-wise, it’s the same. As you can see by the chart below, ten out of the eleven primary sectors are showing positive gains.
U.S. Sector Performance
| Name | YTD | 1 Year | 3 Years |
| Technology | 22.41% | 29.22% | 139.62% |
| Communication Services | 20.56% | 29.00% | 143.70% |
| Industrial | 16.73% | 13.50% | 85.66% |
| Utilities | 16.33% | 8.13% | 34.41% |
| Financial Services | 10.47% | 18.43% | 75.86% |
| Consumer Discretionary | 7.48% | 20.84% | 69.28% |
| Basic Materials | 5.40% | -7.76% | 30.39% |
| Energy | 4.30% | -0.51% | 24.05% |
| Healthcare | 4.29% | -6.36% | 18.46% |
| Real Estate | 3.59% | -5.11% | 17.00% |
| Consumer Staples | -0.46% | -5.40% | 17.26% |
Source: SeekingAlpha.com
Even the government shutdown doesn’t seem to be affecting the market’s momentum.
That’s great, isn’t it? I love watching my portfolio grow!
However, with all the excitement about your stocks rising, you may be neglecting one essential rule of managing a portfolio, and that is the need for occasional rebalancing to make sure you are not over-weighted in any particular stock or sector.
Honestly, you should be rebalancing on a regular basis, for a couple of reasons:
1. Market ups and downs. As the market climbs, many of your holdings will occupy a larger percentage of your portfolio, reducing your diversification and increasing your risk, so you may want to take some profits and move that money into different investments. Likewise, as markets decline, you may want to add to some positions that are selling at a discount.
2. Life events that may change your financial goals—situations such as upcoming retirement, buying a home, getting married, having children, educational needs, etc. As we approach retirement, most of us tend to become a bit more conservative in our investing strategy. And if you have big expenses on the horizon (weddings or education, for example), you may want to build more liquidity into your portfolio so that you have an extra cushion of cash.
Methods for Rebalancing
Investors often have their own approaches for deciding when to rebalance their portfolios, but investment pros agree that these three methods work well:
Calendar Approach: Review and adjust your portfolio at set intervals, like once a year or quarterly.
Threshold Approach: Rebalance when the allocation of an asset class moves a certain percentage point, either above or below its target. Many experts suggest using 5% for larger assets and 25% for smaller holdings. This is called the 5/25 balancing rule, also known as the Larry Swedroe rule.
Here’s how it works:
Identify Large Allocations (5% Rule): For asset classes that make up 20% or more of your portfolio, you set an absolute threshold of 5%.
Example: If you target 40% in fixed income, you would rebalance when that allocation reaches 45% or 35%.
Identify Small Allocations (25% Rule): For asset classes that represent 10% or less of your portfolio, you set a relative threshold of 25%.
Example: If you target 10% in international stocks, you would rebalance when that allocation falls to 7.5% (10% - 2.5%) or rises to 12.5% (10% + 2.5%).
Hybrid Approach: A combination of the above two methods: Check your portfolio on a schedule (e.g., quarterly—my favorite!) and only rebalance if the asset allocation has drifted beyond a set threshold.
If you use one of these disciplined approaches, rebalancing is easy—you just sell overweight assets and use those funds to buy underweight assets. This way, you are taking profits—hopefully buying low and selling high—while keeping your portfolio in balance and diversified.
If You Don’t Want to Be Bothered…
I understand that many investors don’t want to spend a lot of time on monitoring their holdings. And if that’s your mindset, I’d recommend that you consider investing in target date funds.
Target-date funds are funds that automatically shift your asset allocation from higher-risk, higher-return investments (like stocks) to lower-risk, lower-return assets (like bonds) based on a future target date (such as retirement). Think of them as “set it and forget it” types of investing.
At the outset, you choose your target date based on your investment goals. However, you know that goals sometimes change, so I would suggest at least reviewing your goals every year, so you make sure you are still on the right path. And realize that these kinds of funds typically have higher fees, so keep that in mind.
3 Target-Date Funds to Consider
Here are a few target-date funds that are highly rated and look attractive right now:
| Fund/Symbol | Morningstar Rating | Expense Ratio | YTD Return | 5-yr Return (Annualized) |
Mutual of America Clear Passage 2055 Fund (MUROX) | 4* | 0.140% | 15.23% | 13.71% |
BlackRock LifePath Index 2055 (LIVAX) | 4* | 0.36% | 18.28% | 12.80% |
Nuveen Lifecycle Index 2055 Premier (TTIPX) | 5* | 0.25% | 17.4% | 12.41% |
Just remember, markets go up and down, and portfolios are not static. So, rebalancing once in a while will help you maintain your investment strategy and goals.
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