Rebalancing and Dollar Cost Averaging Can Help Get Your Portfolio Back On Track

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Wealth Management Insights
submitted by Michael Chorley, Senior Vice President, Private Wealth Management,
Minnetonka Office of Robert W. Baird & Company

As the markets recover, rebalancing and dollar cost averaging can help get your portfolio back on track.

The rapid decline of the markets in 2008 and early 2009 caused many investors to shift their portfolio allocations to favor more conservative positions, including cash. Now, with the markets up nearly 40% from their 12-year lows in March, many investors are wondering how best to increase their exposure to equities again. For those seeking a way back to a more balanced or growth-oriented asset allocation, portfolio rebalancing and dollar cost averaging are time tested investment strategies that can be especially valuable in today's market environment.

What You Should Know:

1. Portfolio rebalancing is critical to long-term investment success.

Establishing an ideal asset allocation (ie: mix of assets across stocks, bonds, and cash) is only the first important step in creating and maintaining an effective investment portfolio. Regularly revisiting your portfolio and rebalancing your assets to your target allocation is important to keep your plan on track to your goals, especially amid rapidly changing market conditions.

Done properly, rebalancing involves:

- Moving existing assets from high-performing investments into lower performing investments with upside potential, or

- Changing the way new assets are allocated to put more into lower-performing investments.

If you're like many investors who shifted to more conservative portfolio allocations over the past six months due to market volatility, rebalancing back to your target asset allocation now can help you position your portfolio for the economic recovery ahead.

2. Dollar cost averaging is a smart way to expand your exposure to equities.

Many investors know the best time to buy shares in stocks or mutual funds is when they are cheap and expected to rise in value. There are many investors who see both factors in play today. However, the volatility we're experiencing as the markets recover has some investors understandably cautious.

Dollar cost averaging is the principle of investing the same amount of money in a particular security at regular intervals over an extended period of time. By doing so, you essentially force yourself to purchase fewer shares when the security is performing well and more shares when it is undervalued. This strategy can be extremely effective in volatile market conditions as it helps mitigate the effects of market fluctuation on average share price while gradually increasing an investor's position in a security.

What Should You Do Now:

If you haven't rebalanced your portfolio since shifting to a more conservative posture in 2008 or early 2009, you should consult your Financial Advisor to revisit your investment allocation and make sure you have the proper mix of assets to reach your goals. And, if you want to increase your exposure to equities as the economy recovers but remain concerned about daily volatility, you should work with your Financial Advisor to determine if dollar cost averaging makes sense for you.

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