Investors Need To Avoid These Six Mistakes When Rebalancing Their Portfolios

Avoid These Six Mistakes When Rebalancing Your Portfolio (Morningstar)

As the time approaches to check up on your portfolio and make adjustments, there are several common mistakes you should be wary of, according to Morningstar's Christine Benz.

"For example, a portfolio that was 50% stocks and 50% bonds coming into 2009 would have been nearly 60% stocks by the end of 2012," Benz writes. "If the target allocation were 50/50, many experts would have recommended trimming at that point; after all, the portfolio's asset allocation had veered by nearly 10 percentage points from its target. But rebalancing at that point would have hindered, not helped, the portfolio's subsequent performance. Stocks went on to enjoy tremendous gains in 2013--so great that the portfolio that was 50% stock/50% bond at the beginning of 2009 would have been roughly two-thirds equity as of August 4, 2014."

The six mistakes include:
1. "Not starting with your company retirement plan assets:" Concentrating rebalancing activities within your tax-sheltered accounts like the company retirement mean "Not only will you not incur any capital gains taxes as you make changes to these accounts (you only pay taxes when you pull your money out), but 401(k), 403(b), and 457 plans are usually free of loads and other transaction costs, too."
2. "Failing to pick your spots: ...Correcting any imbalances with your baseline asset allocation is job number one of rebalancing. …But rather than taking an equal percentage out of each of your equity holdings and adding proportionately to each of your bond positions, it pays to be surgical when deciding where to subtract and where to add."
3. "Not addressing other problem areas: ...Concentrate your trimming on parts of your portfolio that were bugging you anyway."
4. "Settling for faux-diversification": Don't give up stocks only to load up on bonds with stock like qualities. "Remember, the goal of portfolio rebalancing is to take risk off the table, and the best way to do that is to make sure your holdings aren't all moving in lockstep."
5. "Not tying in rebalancing with other planned distributions: If you're retired and actively taking withdrawals from your portfolio …t's valuable to coordinate rebalancing with those withdrawals. That way you can reduce your portfolio's risk level while also freeing up cash."
6. "Not moving slowly if your portfolio is dramatically out of balance: ...step back and think through your strategy for putting money to work"

For Investors Who Need To Draw On Their Savings, Volatility Can Be Costly (AllianceBernstein)

On the AllianceBernstein blog, Chris Marx and Kent Hargis write that volatility can be very harmful to your savings if you need to withdraw funds.

"We are all prone to performance chasing, leading many of us to make the classic mistake of buying high when markets boom and bailing out too quickly when they bust (and forfeiting the chance to participate in subsequent recoveries). It's harder to resist these impulses during volatile periods, which can erupt with little notice," Marx and Hargis said.

"Even if you have the stomach to ride these upheavals without changing your allocation, volatility can still hurt," they said. "It's a function of the cruel math that governs the difference between average returns and compounded returns: if a stock falls by 50%, it needs to rebound by 100% to restore lost ground. The steeper the fall, the harder it is to climb back. Compounded over time, big price swings can be a significant drag on long-term performance."

Alternative Investments Will Make Up To 40% Of Asset Management Revenues In Six Years (Reuters)

There's a huge growth opportunity in alternative investments coming up, according to McKinsey & Co. By 2020, alternative investments, including hedge funds and private equity funds, will earn up to 40% of global revenues in the asset management industry.

"Investors seek alternatives, which may invest in assets such as timber or real estate or use tactics such as betting against securities, for so-called 'uncorrelated' returns that do not move in tandem with traditional stock and bond markets. Fears of a downturn in stock or bond markets have been known to trigger demand for alternatives," according to Sam Forgione from Reuters.

"The report said some investors were seeking alternatives for their safety as an 'insurance policy' against market volatility, while defined-benefit pension plans were seeking 'higher-yielding alternatives' compared to traditional stocks and bonds to meet investment goals," he writes.

Most Advisory Firms' Strategic Plans Need Fixing (Financial Planning)

In an article for Financial Planning, Ann Marsh writes that most firms' strategic plans are flawed. According to a study by FA Insight for TD Ameritrade, only 17% of firms said their strategic plans were a large factor in their success.

"So what's going wrong? In most cases, advisors are not linking team members' performance to specific strategic outcomes, the study found -- nor are they promoting internally to give team members greater responsibility in areas that need attention," Marsh writes. "They aren't using leading indicators, such as client satisfaction surveys, to gauge their progress, [Director of research at FA Insight Dan] Inveen says -- and most aren't proactively hiring to bring on better skill sets."

"I think the main takeaways are the importance of doing strategic planning right -- in terms of setting objectives, focusing on leading indicators rather than lagging indicators, detailing out how these objectives will be achieving and assigning accountability," Inveen tells Marsh.

Investors Are The Most Pessimistic They've Been In A Year (American Association of Individual Investors)

According to a survey from the American Association of Individual Investors, investor pessimism is on the rise, and at its highest level in nearly a year. The AAII Sentiment Survey said bearish sentiment is up 7.1 percentage points, and above the historical average by about 8 percentage points. Bullish sentiment went down 0.2 percentage points, and neutral sentiment declined 6.9 percentage points.

"Bearish sentiment, expectations that stock prices will fall over the next six months, spiked by 7.1 percentage points to 38.2%. This is the largest amount of pessimism recorded in our survey since August 22, 2013. It is also the first time since April of this year with a bearish sentiment reading above the historical average of 30.5% for two consecutive weeks," the survey said.