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(Photos.com/Francesco Ridolfi)
(Photos.com/Francesco Ridolfi)

Your portfolio

When to rebalance, and when to avert your eyes Add to ...

Rip Van Winkle would be an ideal investor, says Richard Thaler, the University of Chicago economist who specializes in behavioural finance. After investing in stocks, Mr. Van Winkle would sleep through all the ups and downs in the stock market over the next 20 years and emerge a prosperous man.

Mr. Thaler means to say, of course, that investors are better off not checking their portfolios too much. History shows stocks have generated the best returns of any asset class over the long run within North America – but they are volatile in the short run and investors who track things too closely are more likely to be frightened out of their positions prematurely.

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Taking a 20-year nap is, admittedly, not much of an investment strategy. Truth be told, Mr. Thaler would be okay with investors staying awake and taking a peek once in a while. But many advisers and academics recommend that those peeks be to mostly rebalance and see whether the portfolio is on course to achieve the investor’s financial objectives.

What helps with staying the course is adding bonds to the portfolio. They smooth the path of returns, making it easier on the nerves. A common asset allocation for middle-aged people is 40 per cent bonds and 60 per cent stocks.

“However, as the markets move up or down, your portfolio will eventually drift off course,” writes Dan Bortolotti in MoneySense Guide to the Perfect Portfolio. During boom times, for example, an investor’s stock allocation could rise from 60 per cent to a more risky 75 per cent. “So about once a year,” continues Mr. Bortolotti, “you should rebalance by selling off some of your outperforming funds and adding the proceeds to the funds that are lagging.”

Andrew Hallam, author of Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in School, rebalances his portfolio of three exchange-traded funds (ETFs) once a month when he adds fresh money (salary, dividends, etc.) to buy the ETF that has underperformed the most. “If the stock market drops by roughly 20 per cent or more,” he adds, “I’ll rebalance by selling some of my bond index to buy some of my stock indexes.”

Michael Wiener, author of the Michael James on Money blog, is a seasoned investor who doesn’t need bonds to smooth volatility. He follows the asset allocations of his all-stock portfolio in a spreadsheet and when an asset has trended 25 per cent (or some other tolerance level) beyond its target allocation, a cell will signal the need to rebalance by flashing red.

Investors should calculate the rate of return they need to reach their savings goal, says Adrian Mastracci, a portfolio manager with KCM Wealth Management Inc. in Vancouver. Within this context, quarterly monitoring of a portfolio “should suffice.” If the actual rate of return is falling substantially short of what’s required, for example, the investor might take remedial steps such as raising their savings rate.

Investors also should review brokerage statements as they come out, advises Doug Cronk, a Vancouver-based pension fund officer. “The fine print on the back of the statement says something like: ‘Review within 30 or 60 days, or we wash our hands of any errors,’” notes Mr. Cronk, who also writes the Institutional Investing for Individual Investors blog.

Active investors need to do more monitoring than passive investors, says Saj Karsan, a Warren Buffett disciple who blogs at Barel Karsan: Value Investing.

“Even as a long-term investor, I do monitor the investment portfolio at least daily. This is to take advantage of the market's volatility, which may provide buy or sell opportunities for a given stock.” Active investors may also have to watch for other things, like opportunities to engage in tax-loss selling near year end.

Another value investor, Kevin Graham, is “not driven to have a fixed percentage of investments” in a sector. “If I rebalance, it is only to buy something that is relatively cheaper than a current holding,” notes Mr. Graham, who blogs at Canadian Value Investor.

Larry Swedroe, author of The Only Guide to a Winning Investment Strategy You’ll Ever Need, gives some general advice about monitoring your investments: Think of yourself as a postage stamp.

“The lowly postage stamp does one thing, but it does it exceedingly well. It sticks to its letter until it reaches its destination. Your job is to act like that postage stamp – adhering to your plan and ignoring the noise of the market – until you reach your investment goal.”

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