It's "That Time of Year"

Nope, I'm not talking about the supposedly depressing time between the holidays and spring where people are tightening purse strings and lightening intakes to compensate for December's over indulgences. (By the way, is that why Valentine's Day was invented -- something cheery in the middle of the winter doom and gloom?) Nor do I mean it's time to make sure you're keeping those resolutions -- at least another week or so.

By "that time of the year", I mean an annual date with your portfolio to rebalance. Why? Over the course of 365 days, a lot will change. Some investments gain, others lose. Those that gain usually hold a higher than intended percentage of your funds; those that lose a lower amount than you'd like. For example, you decided to hold 50% US and 50% international funds. In this hypothetical year, the US did really well and those abroad declined, so now you hold 60% of the former and 40% of the latter.

Trying to "ride" the better returning assets may seem like a great idea -- why would I sell something that's doing well and re-invest in something that is lagging? The answer lies in risk mitigation. When you unknowingly stray from your intended allocation, or do so to "ride the wave", you move away from your investment strategy. And that's not recommended because it usually means you're acting with emotion -- chasing returns, or trying to avoid normal market volatility. Furthermore, the process might repeat in year two and intensify the effect.

Some advocate rebalancing every 15 months to take advantage benefits associated with sale of long term gain. I recommend every year for two reasons: 1) it's easier to remember; and 2) most LMF4HMW readers hold the majority of our investments in our retirement accounts, so we don't have to worry about tax ramifications until we're receiving distributions.

A lot of retirement accounts have handy "rebalance" buttons where all is done in a matter of a quick mouse click. In others you'll need to send in a fax or make a phone call. But in any case, it's 5 or less minutes well spent and that is time you won't spend eating or spending money!