Finding Your Balance

As an investor, you hardly need to be reminded about market volatility, having lived it for the past several years. Even though the S&P 500 had an 8.2% average annual return from 1990 to 2009, the index has still seen some remarkable gains and losses.
One way to help manage volatility is through asset allocation. But this process of determining the appropriate proportion of assets based on your financial goals, risk tolerance, and time horizon is not a set-it-and-forget-it strategy. Once you have implemented your preferred asset allocation, it’s time to stick to your strategy.

Over time, the performance of the different investments in your portfolio will invariably cause your allocation to change. Taking time to periodically rebalance — that is, to buy or sell investments to bring your asset mix in line with your target allocation — may help you be in a better position to pursue your long-term goals.

Rebalancing can help you stick to your investment strategy. It may also help you avoid the pitfalls of market timing, chasing performance, and overexposing your portfolio to one asset class.

In the process of rebalancing your portfolio, you may incur commission costs as well as taxes if you sell investments for a profit. Therefore, it may not be a good idea to rebalance too frequently. Generally, once a year should suffice. However, you may also want to rebalance whenever the percentage of an asset class rises above a certain threshold, say 5% to 10% over your preferred asset allocation, or if your risk tolerance changes.

Asset allocation does not guarantee against investment loss. It is a method used to help manage investment risk.

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2010 Emerald.

More info? Contact a preferred Naperville Investment Advisor, Platinum Financial at 630-548-9600

Friday, December 10, 2010