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Q&A With M*'s Christine Benz: Hold Your Nose And Rebalance; Text & Video Presentation
It's impossible to "rebalance" if you don't have a reference of what "balanced" should be for you and your ever changing risk profile.
For this reason I try to imagine my portfolio design much like the design of a bicycle rim which I'll refer to as a "Hub" and "Spoke" fund approach. My "hub" funds are usually the "sleep well at night" funds in my portfolio. For example, I identify a well diversified fund platform at a single fund company (Vanguard, Fidelity, T.R. Price, American Century, etc.) or a brokerage platform that has many fund choices.
My first set of fund choices are my "hub" funds. I consider these funds long term holds, usually conservative to moderate in allocation, well managed (either by costs and/or performance), and usually well diversified across asset classes.
Using Vanguard (fund family) as an example, a "hub" holding might be one or more of the following: VWINX, VWELX, VBINX, VTMFX, VGSTX. As a young investor I would fully fund one of these funds first, before adding "spokes".
"Spoke" funds might require a bit more research and a bit larger portfolio to eventually fund. You may want to develop this set of choices based on your desire to hold additional investments that I'll put into two categories:
- Risk Focused Funds (that attempt to address risks) such as inflation risk (TIPS), currency risk (Gold), or equity risk (Treasuries, multisector bonds, other bonds or cash). - Concentrated Sectors Funds (Energy, Healthcare, Utilities, Emerging Market, Small Cap, etc.).
Rebalancing (based on overall percentages) is as simple as moving into or out of the "spoke" funds by exchanging though the "hub" fund.
Your allocation percentages have a lot to do with your risk profile, your age, and your investment time frame. Try to determine a "balanced" that meet your personal needs. Express it in percentages such as,
60% - "Hub" fund(s) 20% - "Spoke" fund(s) that address Inflation, currency, equity risk 20% - "Spoke" fund(s) that concentrate on sector bets
Bottom line, you can't "rebalance" your portfolio if you don't have a reference of what "balanced" should be for you and your ever changing risk profile. The fewer moving parts, the easier it is to identify where rebalancing is required. Finally, the percentages of the "hub" and "spoke" may change as it rolls towards your investment goals.
Additional Note: Be sure your holding periods are long enough so as not to trigger early redemption fees.
Hope others chime in with their personal approaches.
Comments
It's impossible to "rebalance" if you don't have a reference of what "balanced" should be for you and your ever changing risk profile.
For this reason I try to imagine my portfolio design much like the design of a bicycle rim which I'll refer to as a "Hub" and "Spoke" fund approach. My "hub" funds are usually the "sleep well at night" funds in my portfolio. For example, I identify a well diversified fund platform at a single fund company (Vanguard, Fidelity, T.R. Price, American Century, etc.) or a brokerage platform that has many fund choices.
My first set of fund choices are my "hub" funds. I consider these funds long term holds, usually conservative to moderate in allocation, well managed (either by costs and/or performance), and usually well diversified across asset classes.
Using Vanguard (fund family) as an example, a "hub" holding might be one or more of the following: VWINX, VWELX, VBINX, VTMFX, VGSTX. As a young investor I would fully fund one of these funds first, before adding "spokes".
"Spoke" funds might require a bit more research and a bit larger portfolio to eventually fund. You may want to develop this set of choices based on your desire to hold additional investments that I'll put into two categories:
- Risk Focused Funds (that attempt to address risks) such as inflation risk (TIPS), currency risk (Gold), or equity risk (Treasuries, multisector bonds, other bonds or cash).
- Concentrated Sectors Funds (Energy, Healthcare, Utilities, Emerging Market, Small Cap, etc.).
Rebalancing (based on overall percentages) is as simple as moving into or out of the "spoke" funds by exchanging though the "hub" fund.
Your allocation percentages have a lot to do with your risk profile, your age, and your investment time frame. Try to determine a "balanced" that meet your personal needs. Express it in percentages such as,
60% - "Hub" fund(s)
20% - "Spoke" fund(s) that address Inflation, currency, equity risk
20% - "Spoke" fund(s) that concentrate on sector bets
Bottom line, you can't "rebalance" your portfolio if you don't have a reference of what "balanced" should be for you and your ever changing risk profile. The fewer moving parts, the easier it is to identify where rebalancing is required. Finally, the percentages of the "hub" and "spoke" may change as it rolls towards your investment goals.
Additional Note: Be sure your holding periods are long enough so as not to trigger early redemption fees.
Hope others chime in with their personal approaches.