Re-balancing Your Portfolio
Re-balancing is the process of restoring a portfolio to its original risk profile. There are two ways to rebalance a portfolio.
The first is to use new money. When adding money to a portfolio, allocate these new funds to those assets or asset classes that have decreased their percent allocation. For example, if bonds have fallen from 40% of a portfolio to 30%, consider purchasing enough bonds to return them to their original 40% allocation. Diversification is an investment principle designed to manage risk. However, diversification does not guarantee against a loss.
The second way of re-balancing is to sell enough of the “winners” to buy more under performing assets. Ironically, this type of re-balancing actually forces you to buy low and sell high.
Periodically re-balancing your portfolio to match your desired risk tolerance is a sound practice regardless of the market conditions. One approach is to set a specific time each year to schedule an appointment to review your portfolio and determine if adjustments are appropriate.
THE GREAT DEBATE CONTINUES: ACTIVE VS. PASSIVE
Whether it’s sports, music, or politics, life holds any number of “great debates”– debates that never seem to reach a conclusion. In investments, that great debate asks the question, “Active or Passive Investing: Which is Better?”
The fascinating aspect of this debate is that equally intelligent people can argue polar opposite positions, leaving the rest of us to wonder what the answer is, if one even exists.
Passive Pointers: The case for passive management (like the use of Exchange Traded Funds/ETFs that mirror an index) is anchored in the evidence that the preponderance of money managers have failed consistently to beat their comparative index. This is true for two primary reasons:
- Markets are efficient and all known information is already reflected in the price of the stock, making it difficult for managers to find companies that are expected to outperform.(1)
- The hurdle of an elevated expense ratio typical of actively managed mutual funds makes it hard to match or exceed a low-expense index fund.(2)
Active Arguments: Active managers (like mutual funds that follow a buy and sell strategy) counter that while the markets may be generally efficient, there are windows of inefficiency created by the time it takes for information to properly reflect in a stock’s price.
Active managers further argue that performance is not just about relative return, but also about managing risk. For instance, if an active manager can deliver a hypothetical 90 percent of the index return at 70 percent of its risk, then that constitutes a measure of outperformance.(2)
Unlock the Combination: Ultimately, it’s a decision based on what you want to pursue. Do you prefer the approach taken by index funds or the strategy behind active management? For some, the combination of both funds represents an approach that takes no sides but seeks to tap into the distinctive benefits each offers.
(1.) Keep in mind that the return and principal value of stock prices will fluctuate as market conditions change. And shares, when sold, may be worth more or less than their original cost. (2.)This is a hypothetical example used for illustrative purposes only. It is not representative of any specific investment or combination of investments.
Here is the Cox Global question checklist to review before spending your government stimulus check:
1. Can I pay for next month's rent, groceries, and utility payments?
2. Do I need to add money to my emergency fund?
3. Do I owe the IRS money?
4. Do I have any outstanding debts?
5. Is there a person or group of people who can use my check more than me?
6. Is there an investment opportunity?
Remember this check is to help secure your current financial situation as much as possible. Spend it wisely.
SBA Resources & Guidance for small businesses: https://www.sba.gov/page/coronavirus-covid-19-small-business-guidance-loan-resources
We welcome your appointment with our office to review your portfolio or current scenario. Please don't hesitate to call 281-395-8300. We want to be there for you when you need us. Let us know how we can help.