This week’s theme is the immutable principles of successful investing.  Successful investing for the long-term requires discipline and sticking to a set of unchanging principles, and today’s immutable, unchanging principle is:

Rebalance your portfolio if it drifts more than 5% away from your ideal asset allocation

Tuesday and Wednesday were devoted to getting your asset allocation right. And today, I want to talk about a related topic, which is rebalancing.

One of the most important decisions you or your advisor can make when it comes to your portfolio is: When you should rebalance your portfolio.

Some investment experts recommend every quarter, or once a year. In my experience, I’ve found that the best method is not based on a set, automatic schedule, but based on

1) how far your current portfolio has deviated from your ideal asset allocation, and

2) your age.

Some people might go 10 years without ever once rebalancing their portfolio. This is dangerous because you might have individual positions, whether they be stocks or mutual funds, that have ballooned and now represent a larger percentage of your portfolio than they should. Or, more importantly, you might have an overall portfolio allocation that has veered dramatically off course from your ideal mix of stocks and bonds.

If you were 50% in stocks & 50% in bonds 5 years ago, and haven’t rebalanced, chances are your portfolio is now 60 or 65% in stocks, and you’re taking on more risk than you should.

So keep an eye on each of your investment holdings, and especially on your overall portfolio asset allocation. If your overall allocation drifts more than 5% outside of your ideal mix, then you’ll want to rebalance.

It’s what we call the 5% rule and it works remarkably well for maintaining a targeted asset allocation and for helping you to buy low and sell high.

That’s it for today. Thanks for listening.

Tomorrow we’re going to talk about the importance of diversification.

My name is Ashley Micciche and this is the One Minute Retirement Tip.

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