4. How to rebalance your portfolio

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By Money Magazine staff

Thanks to the recent stock market pounding, your carefully calibrated asset allocation may now be drastically out of whack. To get back to your best balance, follow these steps.

  • Step 1 Gather all your financial statements - for 401(k)s, IRAs, brokerage accounts and anywhere else you keep savings or investments.
  • Step 2 Lump their contents together. "People often make the mistake of thinking that they have to rebalance individual accounts," says Gary Schatsky, president of ObjectiveAdvice.com. "What has to be balanced are your overall assets."
  • Step 3 Break down the assets into three major categories: stocks, bonds and cash. That can be harder than it sounds when it comes to certain mutual funds, so enter your holdings into Morningstar's free Instant X-Ray tool. It does the work for you, displaying the asset breakdown in a pie chart.
  • Step 4 Compare this pie chart with your target. Say you've decided on an allocation of 60% stocks and 40% bonds. The market may have shifted your actual ratio to 50/50.
  • Step 5 Sell investments you're overweighted in and put the money into those you're underweighted in. In the example above, if your overall portfolio worth $400,000, you'll move $40,000 (10%) from fixed-income to equity investments.
  • Step 6 Repeat every year - and whatever happens in the short run, take solace in knowing that you're capturing returns on your winners and buying stragglers on the cheap. --E.F.K.


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