By Suzanne Hazlett, MBA, CIMA®, CFP®
When financial markets shift, they can impact the balance of different types of assets within a portfolio. Rebalancing is a smart tactic to use when your investments get overweighted in some areas and underweighted in others.
What do we need to rebalance?
Asset allocation is a commonly used term in the investment realm that simply means the percentage we allocate to different classes or types of investments. Think of your portfolio as a pie. What is the proportionate share of the pie you attribute to each asset class?
Cash or cash equivalents, such as money market funds, short-term certificates of deposit, savings accounts, and checking accounts are all examples of this class of assets.
Fixed income – more commonly thought of as bonds – represent another asset class. When we own bonds, we are the lender. As bondholders, we lend our funds in exchange for interest payments and an agreed-upon timeline for our principal’s return. There are other types of bonds, as well as securities that differ from bonds that are still considered part of the fixed-income class.
Equities, otherwise known as stocks, make up another asset class. When we own stock, we own a piece of a business. Our investment expectation is that we will see an appreciation in our holding and possibly an income stream from dividends.
Real estate – real property is yet another class of assets. We may own vacant land, residential property, or a commercial building. We can alternatively own a derivative of actual property through a real estate investment trust.
Commodities are different from conventional equity, income, cash asset categories. They are the raw materials of industry and commerce. Think copper, steel, concrete, agricultural products.
To rebalance, we must first have a basis for our investment strategy. Do you have a well-thought-out premise? If not, start by focusing on your foundation. Then, when investments shift due to market fluctuation, get back to your foundation. Pare positions that have grown disproportionately and add to diminished holdings that have declined.
Every market can present opportunities and provide valuable reminders. Periodically reassess your plan and confirm your investments are in alignment with your intended strategy. If they are out of balance, it’s time to rebalance.
Suzanne Hazlett is a Certified Investment Management Analyst® and CERTIFIED FINANCIAL PLANNERTM. Diversification and rebalancing offer no guarantees against principal loss. HAZLETT WEALTH MANAGEMENT, LLC is independent of Raymond James and is not a registered broker/dealer. Investment advisory services are offered through Raymond James Financial Services Advisors, Inc. Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. 675 Sun Valley Road Ketchum, Idaho, 208.726.0605. HazlettWealthManagement.com.
