ROANOKE TIMES
Copyright (c) 1996, Roanoke Times
DATE: Monday, June 10, 1996 TAG: 9606100065
SECTION: MONEY PAGE: 6 EDITION: METRO
DATELINE: NEW YORK
SOURCE: JANE BRYANT QUINN WASHINGTON POST WRITERS GROUP
Do you rebalance your investments? If not, why not?
These are important questions. With the stock market stalled at a level high enough to cause a nosebleed, rebalancing your investments reduces your risk.
The Baltimore mutual fund group, T. Rowe Price, is so convinced that individual investors will want to use this strategy that it recently introduced an automatic rebalancing service for its Individual Retirement Accounts.
So what is rebalancing? It's the handmaiden of asset allocation, which is today's most popular investment approach.
When you allocate your assets, you don't buy stocks and bonds (or stock funds and bond funds) in random amounts. Instead, you decide what percentage of your financial investments should stay in stocks and what percentage in bonds. That's called an ``allocation.''
You own stocks for growth and bonds for reducing the size of your losses when the stock market falls. The classic, conservative pension-fund allocation is 60 percent stocks and 40 percent bonds. But portfolios don't stand still. They change as the market does - and that's where rebalancing comes in.
Say that, on Jan. 1, 1995, you started out with 60 percent stocks and 40 percent bonds. Stocks soared last year. By Dec. 31, they would have risen to 63.4 percent of your portfolio, leaving 36.6 percent for bonds.
But a portfolio containing 63 percent stocks is slightly riskier than one with only 60 percent stocks. It would drop more in value if the stock market fell.
Asset allocators don't like to change the level of stock-market risk they take. If a 60/40 mix of stocks and bonds was right for you last year, it's probably right for you this year.
So you would ``rebalance'' your portfolio, bringing it back to its original 60/40 split. That means selling some stocks and reinvesting the money in bonds.
If the stock market falls, and the value of your stocks drops to less than 60 percent of your portfolio, you would sell some bonds and reinvest the proceeds in stocks.
This strategy also can help your investment returns. You're always selling investments when prices are high and recycling the proceeds into investments whose prices are low. Sometimes (not always) rebalancing yields better results than buying stocks and bonds and holding on to them.
Rebalancing is especially prudent in stock markets like the one we have today. When stocks drop, they could come down hard. If they amount to a higher-than-normal percentage of your assets, you'll have a higher-than-normal loss. By rebalancing, you reduce your stockmarket risk by putting the money somewhere else.
Three things about rebalancing:
It works best with mutual funds - especially no-load funds, which don't levy sales charges when you buy and sell.
It works best in tax-deferred retirement accounts. You probably won't want to rebalance in accounts where you're taxed on the profits each year. Paying taxes reduces your long-term return.
It works best when you don't try to ``time'' the market. Some people change their stock allocation on a guess that the market will rise or fall. But it's almost impossible to time a market correctly.
T. Rowe Price's new service is free to anyone with at least $25,000 invested in its mutual funds. You pick the balance you want among your mutual funds; once a quarter, T. Rowe Price will buy and sell shares to restore the balance you started with. Investors who work with financial planners or stockbrokers typically pay around 1 percent to 1.75 percent to have the adviser automatically allocate their assets for them.
If you're rebalancing by yourself, once a quarter is probably too often, because your investment mix won't have changed enough. Rebalancing once a year might be enough - and even then, only if your portfolio is out of whack by 10 percent or more.
LENGTH: Medium: 79 linesby CNB