(Due to the length of this post, I've broken it down into two pieces. Here is part one.)
Professionals and personal finance bloggers often tout the benefit of rebalancing your portfolio every so often in order to maximize gains. The problem is that they never explain how to go about doing this. I try to rebalance my IRA every quarter when I receive the dividends on my investments. To me, this is the most logical because I have to reinvest the dividends anyway on all of my ETFs. If you have mutual funds that automatically reinvest dividends, doing a yearly rebalancing is all that’s really necessary (unless you are obsessive like I am).
The first thing I do is make sure that I’m still on track. I compare my overall gain to the S&P 500 returns for the quarter to see if I was able to beat the “broader market”. The S&P 500 seems to be the benchmark that most funds use, so I go ahead and use that. I use the “Spartan U.S. Equity Index Fund” because it’s the one that’s easily accessible in my 401(k). The YTD return as of 3/31/2006 was 4.19%. I calculated my return as 7.30% for the first quarter of 2006, so once again I managed to beat the market (which makes me happy).
The next step is to compare my current allocations to my targets. Generally my targets break down as:
45-55% Domestic Stocks
35-40% International Stocks
10-15% Real Estate
I break down the International category a little further into 10% Emerging Markets and 25-30% broad-based international. As you can see, my portfolio is all stock, which I feel is appropriate for someone of my age (late 20s). I have 40 years to ride the ups and downs of the stock market, so I am willing to take on more risk for the better returns that stocks have provided over the long term for the past two centuries.
(continue to part two)