5 Smart Ways to Rebalance Your Portfolio
Life + Money

5 Smart Ways to Rebalance Your Portfolio


Sure, the stock market was on fire last week, but for some investors it’s tough to forget about how it felt the week before that. Or to forget that this bull market may be past its expiration date.

The average bull market since 1921 has lasted about 61 months — this one has passed 67. 

That, combined with the Dow’s recent gyrations, has brought the bears out, with many retail investors questioning their investment strategy. Plus, it’s jinx month: The three times the market has crashed — 1929, 1987 and 2008 — they all occurred in October.

Related: How the Stock Selloff Boosted the Economy 

Even those who think the market offers long-term promise are less enthusiastic about its immediate future. “If pushed to say whether I think we’re on the cusp of a real correction — over 5 to 10 percent — I’d say that I’m not sure, but the market doesn’t feel great,” says Jenny Van Leeuwen Harrington of Gilman Hill Asset Management in Westport, Connecticut. 

Still, most financial advisors think it’s a bad idea for investors looking for long-term growth to try to jump out of the market at a high and reinvest at a bottom. “Too many studies have shown that retail investors are poor market timers, and so are pros,” says Liam Timmons of Timmons Wealth Management in Attleboro, Massachusetts. Mistiming those moves could be very costly, research has shown. And the theoretical investor who rode the market’s wave through the ups and downs since 1926 earned an average of about 10 percent a year.

If history is a guide, many nervous retail investors won’t heed that advice. While most advisers wouldn’t recommend taking all of your money out of the market, given that stocks are back near their all-time highs, it might still be a good time to look at how the market's swings have affected your portfolio and, if appropriate, take some gains and rebalance. Use the proceeds to pay down any high-interest debt you have and build your emergency fund.

Related: Don’t Stash Your Cash – Invest It 

After that, it’s OK to keep 5 to 10 percent of your portfolio in cash. Even with today’s low interest rates, you should have a portion of your portfolio invested in bonds. Consider short-term corporate bonds, which offer higher yields, or more conservative high-quality tax-free municipal bonds. The most important caveat of all is this: Always consult with a trusted financial adviser or other professional before making any of these moves, since everyone’s situation is different.

Here are options to consider if you’re looking for other places to put your money to work, depending on your circumstances and time horizon:   

1. Go alternative. Investors increasingly have been sinking money into alternative investments such as private equity, real estate, and commodities since about 2005. Two of these “alts” — real estate investment trusts (REITs) and master limited partnerships (MLPs) — have long histories of solid returns and can be bought as mutual funds or exchange-traded funds, says Joyce Morningstar of Dynamic Wealth Advisors in Scottsdale, Arizona.

REITs are companies that own or finance income-producing real estate. MLPs invest in real estate, energy production, or commodities. Over the long term, the average REIT and MLP investments have paid annual dividends in the 6- to 8-percent range, says Morningstar. Still, she recommends that the two make up only about 1 to 7 percent of the typical investor’s portfolio.

Related: Retail Investors Sit Out the Rally 

2. Bet on both an up- and down-market. “Market-neutral” products are designed to earn a return whether the market rises or falls. One such vehicle, a “long/short” fund, relies on skilled fund managers to take a long position (which rewards a price increase) on undervalued stocks that they forecast to rise and a short position (which rewards a fall) on overvalued stocks they think will drop. 

In this category, Morningstar likes to stick with mutual funds and exchange-traded funds that at a minimum have had the same fund manager for five years and have minimum assets under management of $100 million. Fees typically are high, exceeding 1.5 percent.

3. Refocus on quality stocks. One way to stay in the market while reducing the chance of a big drop in your portfolio is to sink more of it into blue-chip companies, says Timmons. Those larger, older firms have reasonable valuations and tend to hold up better during downturns, he says. Conversely, investors with lots of money in high-growth performers in areas like social media, high-tech, and biotech might reduce their exposure: “When the market corrects, those are the first things to get sold, and they tend to be hit the hardest,” he says. 

4. Ladder up. Trying to figure out the perfect time to exit the market and jump back in may be a fool’s errand, but if you can’t stomach the risk of sticking out the market, there is a safer way to move money in and out. 

Under a “laddered fixed-income strategy,” you take the portion of your portfolio in stocks (with the help of an adviser) and move it into short-term “laddered” bonds or CDs, says Jesse Mackey of 4Thought Financial Group in Syosset, N.Y. These products are called laddered because the bonds and CDs are designed to mature at regular intervals. As they do, you then reinvest the proceeds back into the stock market. The effect is to let you reinvest through dollar-cost averaging — buying fewer shares when prices are high and more when prices are low.

5. Become a banker.Peer-to-peer” lending websites like Prosper.com and LendingClub.com match up investors with individual borrowers seeking lower interest rates. Peer lending industry experts say investors are getting returns that range from 5 to 12 percent, and the returns don’t move with the stock market. That has institutional investors like hedge funds and sovereign wealth funds crowding into the space. But there’s no evidence of how peer lending will perform during an economic downturn, so financial advisors caution that this vehicle shouldn’t make up more than 10 percent of your portfolio.

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