By Yann Kostic from the February 2019 Edition
Step one: Develop a target asset allocation
Given your individual financial circumstances and goals, what percentage of your portfolio should be dedicated to each asset class? For example, when close to retirement, some investors may want the majority of their portfolio in as cash and bonds, with a smaller percentage in stocks to protect their portfolio against inflation.
However this kind of strategy has definitely not worked during the past decade. As the saying goes if you’re younger, and can tolerate the fluctuations of the stock market over time, you may want to put the majority of your investments in stocks. Today, people simply live longer, and with some planning, leave a large part of their wealth to their heirs while enjoying a great retirement, so the time horizon is quite different indeed.
Step two: Evaluate your portfolio
Next, determine if your actual investments match your target asset allocation. If they do, your portfolio is in good shape. If they’re off, consider just how far off they are.
Since making frequent changes to your portfolio can have tax consequences, you may only want to alter the asset mix if it’s off by more than five percentage points.
Step three: Rebalance
If your asset allocation has drifted significantly away from your target, you can rebalance your portfolio in a variety of ways.
For example, you can shift funds out of the asset class that exceeds its target into the other investments, or you can simply add funds to the asset class that falls below its target percentage. You can even direct dividends from the asset class that exceeds its target into the ones that are below their targets.
This will bring your portfolio back into balance, but because of tax implications, it’s important to talk to your advisor before making any significant changes to it.
Note: This material has been prepared for informational purposes only, and is not intended to provide financial advice for your particular situation.
Yann Kostic, MBA and Tom Zachystal, CFP, are Presidents of their respective Assets Management firms, both US-Registered Investment Advisors (RIA). Tom is the San Francisco Financial Planners’ Association President. Tom and Yann cater to US expats in Mexico and worldwide. Comments, questions or to request his newsletter, “News you can use” contact him at firstname.lastname@example.org, in the US at (321) 574-1 529 or in Mexico, (376) 106-1613.
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