Diversification must be periodic, since a portfolio that’s diversified now might not be as well-balanced six months or a year from now. It’s critical to guard against unintentionally becoming concentrated in one area because of investment winners and losers, saysMcKissack. As some assets do well and others hold their value or do poorly, your portfolio’s diversification will change and your asset allocation will go off-target.
Let’s say your target allocation is 35% in large-cap stocks. A few months of blue-chip leadership could push your holdings up to 40% and depress other asset classes. “Periodically rebalancing your portfolio will keep your diversification current and in line with your overall plan,â€ says McKissack.
Rebalancing involves selling and buying portions of your portfolio to make sure that each asset class gets back on the right track. That is, sell your winners and put the proceeds into asset classes that are below their desired level. How often should investors rebalance portfolios? “For LaTasha and other clients, we usually rebalance quarterly,â€ says Grant. “Studies show that the selection of individual securities is secondary to the way you allocate your investment in stocks, bonds, and cash. The allocations will be the principal determinant of your investment returns.â€
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