7 tips for rebalancing your fund portfolio

BOSTON - Summer is generally a calm season for the financial markets. It offers time to reflect, check your mutual-fund portfolio, and see whether you're on track with savings goals.

Yet the summer doldrums haven't arrived. There's been no letup in the stock-market volatility that set in during the spring. Bond investors wonder when interest rates will make their inevitable rise, cutting into returns. A debt default is still possible in Greece. It could happen in the U.S., too, if Congress and President Obama fail to raise the government's debt ceiling by Aug. 2.

For pros and do-it-yourselfers alike, it's a tough environment for restoring an appropriate balance of stocks and bonds in a portfolio.

Starmont Asset Management CEO Harvey Rowen is playing it safe. Rowen sent his clients a letter last week, explaining why he's holding on to more cash. His advice: Expect volatile markets as pre-deadline drama builds.

Despite all the uncertainty, there's no excuse for inaction. Financial pros advise performing a portfolio checkup at least once or twice a year, typically at year-end or midsummer, or both.

Periodically tweaking the mix of stocks, bonds and any alternative assets, such as gold, is essential to avoid taking on too much risk or becoming too conservative. Below are seven portfolio checkup tips, including special considerations for the current market environment:

1. Create a plan.

Determine your appropriate asset mix. For example, an investor expecting to retire around 2025 might set a target of about 70 percent in stocks and 30 percent in bonds. That's just a rule of thumb, as individual circumstances vary. Consider how much you've saved, and how much stock market volatility you're willing to endure. If you're retired, you'll probably want to reduce risk and maintain a regular income stream by emphasizing bonds. If you're younger, be bolder and emphasize stocks.

2. See where you stand.

To assess your asset mix, examine all of your investments as a whole - 401(k)s, individual retirement accounts, and any individual stocks you may own. Rebalancing may be in order if you're 5 percentage points or more above or below your targets - say if your target is an 85 percent stock allocation, and you're at 80 percent.

3. Dive deep to diversify.

You may not need to go beyond assessing the overall mix of stocks, bonds and alternative investments, and making any adjustments. But a more thorough review can pay off. Examine your investments within each asset category, with an eye toward diversification. That means investing broadly across the stock and bond markets, rather than focusing on a few segments.

4. Consider doing nothing.

If a portfolio checkup doesn't reveal any big variations from your savings goals, it may not make sense to make any adjustments. Pitfalls of making too many moves include transaction costs and tax penalties.

5. Limit interest-rate risk.

Bond investors face substantial long-term risk from an inevitable rise in short-term interest rates, currently near zero. When the Federal Reserve raises rates, prices for bonds with locked-in rates will drop. That's because investors will be able to buy newly issued bonds paying higher interest. Why invest $1,000 in bonds yielding 3 percent if you can get 6 percent for the same price?

6. Consider what's hot, what's not.

Stocks of small companies have performed unusually well in recent years. Funds that specialize in small-cap stocks have returned an average of more than 9 percent a year over the latest 3-year period, vs. less than 4 percent for large-cap funds.

Market segments that have been hot this year and deserve special attention include health-care stocks, and real-estate investment trusts. Funds specializing in health-care stocks have returned an average 16 percent year to date, and REIT funds 12 percent. Stocks of big banks have fared poorly, financial services funds have lost an average 3 percent - which could present a buying opportunity.

7. Stay flexible.

Maintaining a small portion of a portfolio in cash investments such as money-market funds can provide cushion from a stock-market decline. That's why Rowen, the money manager who's warning his clients about volatility, is building up his firm's cash stash until politicians agree on a debt-ceiling deal.

by Mark Jewell Associated Press Jul. 17, 2011 12:00 AM



7 tips for rebalancing your fund portfolio