Advisors Prescribe Regular Portfolio Rebalancing
Advisors say that if a client’s financial plan is to work like a fine Swiss watch, then it is important to periodically recalibrate mutual fund holdings that make up that plan.
Year-end is as good a time as any to rebalance mutual fund holdings, although there is a consensus that a particular time is not as important as the fact that it gets done.
An annual evaluation is important and year-end can be a convenient time of year to rebalance fund holdings, according to Harry Greyard, a certified financial planner with Waddell & Reed in Charlotte, N.C.
When and how funds are rebalanced depends on when a client is going to need the money, Greyard says.
If a client is 20 to 30 years away from retirement, it is important to revisit the portfolio, but it is not as critical as if someone is near retirement and will need that income to live on.
Two factors he considers are the client’s need and risk tolerance. Rebalancing is important because it helps maintain diversification, he adds.
However, care needs to be taken to ensure that rebalancing does not become the focus. “Your long-term goal is what is important. Rebalancing is what helps you get there,” Greyard continues.
David Cowles, a certified financial planner with Boone Financial Advisors in San Francisco, says rebalancing is an important tool for his firm because of its focus on asset allocation.
While year-end rebalancing of a client’s mutual fund portfolio is one approach, he says immediate action may be a better tack.
For example, he explains, if your client ends up with 80% in mutual fund equities in July and you wait the five months until year-end, “if the market falls out of the cradle, you’re taking a big loss.
“That’s why you hire us–for the discipline of rebalancing,” he says. Allocation goes against human emotion and enforces the idea of selling high and buying low, Cowles adds.
However, he continues, rebalancing mutual fund portfolios comes at two costs: a tax and a transaction cost.
Cowles says tax costs can be minimized by rebalancing within an IRA account.