Secrets of Managing Your Investment Portfolio

Yet over time, the value of your small-company stocks has increased to where they now account for 70 percent of the dollar value of your stock portfolio and large companies, 30 percent. Your stock portfolio is now way out of balance.

What do you do? It's a good idea to periodically rebalance portfolios, by selling and buying, to restore them to their original asset allocations. Assuming you set up your portfolio correctly, this can help you stay within your risk tolerance.

Some might view rebalancing as selling winners to buy losers. But you can also view it as selling the most overpriced investments to buy undervalued ones. Using this logic, you might have sold tech stocks before they plummeted in 2000. Many investors rebalance quarterly. I recommend rebalancing annually. This way, you can allow your winners to run, but not to run amok.

Instead of rebalancing at regular time intervals, some do so when the proportion of asset classes in the portfolio has changed significantly. For example, you could rebalance after an asset class is 10 percent out of kilter.

Be aware that risk levels change. There is a standard set of asset allocations that many investors use. Conventional wisdom holds investors only need to subtract their age from 100—or, now that people are living longer, from 110—to get the percentage of their portfolios that they should have in stocks, given an average risk tolerance.

This method has been recommended for decades. The problem is that the risk levels of different asset classes change substantially over time—sometimes in only a few years. Let's say you're 50 years old. Having an average risk tolerance, you do the subtraction and determine that you should have 60 percent of your portfolio in stocks.

But after doing some research, you might find that you're taking too much risk because risk levels of stocks may now be far higher than the traditional allocation assumes. In that case, you would want to trim down your stocks and add more bonds, which carry lower risk.

If portfolio maintenance sounds horrendously complex, that's because it is. But by having a sound plan and following it with discipline, you can reduce your would-haves, could-haves and should-haves.

Ted Schwartz, a Certified Financial Planner®, is president and chief investment officer of Capstone Investment Financial Group ( He advises individual investors and endowments, and serves as the advisor to CIFG Funds. Because Schwartz has a background in psychology and counseling, he brings insights into personal motivation when advising clients on achieving their wealth management goals. Schwartz holds a B.A. from Duke University and an M.A. from Oregon State University. He can be reached at

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